Gita Gopinath on Why Interest Rates Have Surged All Around the World

What It Covers

Harvard economist and former IMF First Deputy Managing Director Gita Gopinath explains why global interest rates have structurally shifted higher post-pandemic, driven by three converging forces: AI capital demand pushing r-star above 1%, persistent fiscal deficits near 7% of US GDP, and the collapse of central bank bond-buying programs that previously suppressed yields.

Key Questions Answered

• •R-star shift: The neutral real interest rate has risen from roughly 0.5% pre-pandemic to approximately 1% today, and AI investment demand may push it even higher. Adding the Fed's 2% inflation target produces a structural nominal rate floor near 3%—a clear regime break from the "low for long" decade that investors should price into long-duration asset allocations.
• •Marginal buyer risk: Foreign central banks have largely stopped accumulating US Treasuries, replaced by volatile non-bank financial institutions and hedge funds. This structural shift in who holds sovereign debt means yield volatility will remain elevated regardless of inflation trends, making duration risk management more critical than in any prior post-2008 cycle.
• •AI crowding-out operates on two channels: First, massive private capital demand raises real rates even without inflation. Second, AI build-out consumes physical inputs—copper, electricity, skilled labor—creating inflationary pressure requiring higher nominal rates. Gopinath judges the real-rate channel currently more significant, but both are simultaneously active and compounding each other's upward pressure on yields.
• •Bliss trade fragility: Governments globally have conditioned markets to expect large state interventions during crises, what Gopinath terms "big lasting state support." With US deficits already near 7% of GDP and debt levels at historic highs, fiscal space for another pandemic-scale response has materially shrunk, meaning the next major shock will likely produce far less economic resilience than 2020 did.
• •Debt crisis anatomy in developed markets: Advanced economies borrowing in their own currency do not face sudden payment default but instead a slow-motion credit crunch—rising borrowing costs spreading across asset classes, investment slumping, and growth decelerating. Financial repression and price controls become increasingly likely policy responses as orthodox fiscal consolidation proves politically unachievable in electoral democracies.