Neutral Rate Estimates Rise, Boosting Economy and Bond Yields

The neutral rate of interest, which economists use to gauge whether borrowing costs are stimulating or stifling growth, has been revised upward by central banks. The Federal Reserve's median estimate rose to 3.25% from 3.1%, while the European Central Bank's chief economist put the eurozone's neutral range at 2.5%. Japan's neutral rate also saw a quarter-point increase, according to Goldman Sachs.

Economists see the rise in neutral rates as a positive sign for the economy, implying underlying growth and strength. Sven Jari Stehn, chief European economist at Goldman Sachs, said that an economy sustaining higher interest rates suggests more underlying growth. However, not all agree, with some warning of potential casualties among indebted governments.

The increase in neutral estimates has contributed to the selloff in long-term government bonds, as yields reflect expected central bank rates and debt sustainability. Some on Wall Street have warned that high rates could pull money out of stocks into higher-yielding bonds, but this has not materialized so far.