Jackson Hole Playbook: Three Paths for Real Rates—and What Each Means for Growth

With inflation easing unevenly and policy makers converging on Jackson Hole (Aug. 21–23), the path of real interest rates and the term premium is the macro fulcrum. Where real rates settle over the next few quarters will shape growth, credit costs, and housing in the U.S. and Europe. (kansascityfed.org)

Where real rates sit versus prior cycles

Two quick waypoints:

• U.S. real yields. The 10-year TIPS yield (a clean proxy for the market’s real rate) has been hovering near ~1.9% in early August—high by post-GFC standards and closer to late-1990s territory than to the 2010s. Elevated real yields tell you the “price of capital” is still firm even as headline inflation cools. (FRED)
• Long-run inflation expectations. The U.S. 5-year, 5-year forward inflation expectation rate (the market’s view of average inflation five to ten years ahead) remains contained in the ~2–2.5% channel—consistent with “anchored” expectations. So when nominal yields move, a lot of the motion now comes from real rates and term premium, not from unmoored inflation fears. (FRED)

On term premium specifically, the New York Fed’s ACM term premium series shows the premium has risen from deeply negative levels seen in the 2010s toward modestly positive territory—one reason long-dated yields can be sticky even if policy rates fall. Markets will parse Jackson Hole remarks for any signal about how central banks view this structural drift higher. (Federal Reserve Bank of New York, Liberty Street Economics)

Why Jackson Hole matters this year

Officials enter the symposium with mixed signals: U.S. labor data have softened, and some Fed voices have turned more openly dovish about rate cuts as soon as September, while others stress lingering inflation risks and tariff-related uncertainty. That tug-of-war feeds directly into the expected path of OIS-implied policy rates and, by extension, forward real rates. (Reuters)

In Europe, the ECB’s June cut to 2% and stable July flash inflation (2.0% y/y) have markets debating how quickly policy normalizes from here. The distribution of outcomes is wide: benign disinflation is plausible, but so are sticky services inflation or new supply shocks. Each path implies a different real-rate glide path. (Reuters, European Commission)

Three plausible paths for real rates (and what they mean)

These are scenarios, not predictions. They’re meant to frame the debate, not to suggest any position or strategy.

1) Benign disinflation (soft-landing baseline)

Story: Core inflation grinds lower as goods disinflation persists and services cool gradually; growth slows but avoids recession. The Fed begins a measured easing cycle (markets now consider cuts as early as September), and the ECB charts a cautious path after June’s first step. Real rates drift lower, but only slowly, because term premium stays positive and growth is still decent. (Reuters)

Credit and mortgages (U.S./EU):

• U.S. mortgages: 30-year fixed rates (recently ~6.6%) ease only modestly; affordability improves at the margin, but the housing market remains supply-constrained. Credit spreads stay range-bound. (FRED)
• Euro credit: Investment-grade borrowing costs edge down; bank lending surveys show stabilization rather than a boom. Sticky term premium keeps long ends heavy enough to prevent a rush.

Growth pulse: Real-rate relief supports capex at the margin, but neutral-to-slightly-restrictive long real yields temper animal spirits. The outcome resembles 1995–96 soft-landing dynamics more than the 2010s.

What could push us here? Further disinflation in core services, softer labor prints, and central-bank messaging that embraces measured cuts while acknowledging positive term premium as a structural feature. (Reuters)

2) Sticky services (the “higher for longer” detour)

Story: Headline inflation steadies, but services inflation (shelter, healthcare, insurance) proves stubborn; wage growth cools only slowly. The Fed and ECB move more cautiously than markets hope. Nominal yields settle; real yields stay elevated because inflation expectations remain anchored while policy expectations repriced less dovishly.

Credit and mortgages (U.S./EU):

• U.S. mortgages: The 30-year rate remains closer to 6.5–7%, pressuring affordability and keeping existing-home turnover low. Credit spreads leak wider in rate-sensitive sectors. (FRED)
• Euro credit: With ECB emphasizing caution (recall recent comments about neutral rates and a “high bar” for more cuts), corporate borrowing costs remain sticky; periphery sovereign yields are steady-to-higher in real terms. (Reuters)

Growth pulse: Consumption downshifts; housing and interest-sensitive manufacturing lag. Elevated real rates slow trend growth more notably in Europe, where bank-based transmission is strong.

What could push us here? Upside surprises in core services inflation, firm wage prints, or supply-side constraints that keep output gaps tight without re-accelerating headline inflation. (European Commission)

3) Negative supply shock (oil, tariffs, or geopolitics)

Story: An external shock (energy spike, new tariffs, shipping disruptions) pushes headline inflation up even as growth weakens. If long-run inflation expectations remain anchored, central banks face an uncomfortable choice: tolerate a temporary inflation bump (lower real activity, try to look through it) or resist with tighter policy. Either way, term premium can pop on risk/uncertainty, lifting long real yields even if policy rates don’t rise.

Credit and mortgages (U.S./EU):

• U.S. mortgages: If term premium rises, long mortgage rates can rise or remain elevated even with unchanged policy rates, further squeezing housing. (Federal Reserve Bank of New York)
• Euro credit: Energy-import dependence can push real household incomes lower; credit spreads widen, and funding costs for lower-rated issuers climb.

Growth pulse: Classic “stagflationary tilt”—higher costs, weaker real incomes. Real-rate volatility rises because the split between short-rate expectations and term premium gets noisier.

What could push us here? Energy supply interruptions, intensified trade tensions, or renewed shipping/logistics bottlenecks.

Historical context: why term premium matters now

In the 2010s, term premium estimates were often negative—QE and safe-asset scarcity compressed long yields beyond what policy expectations alone implied. That world made it easier for long-dated borrowing costs to fall whenever growth wobbled. In the 2020s, with central-bank balance sheets stabilizing and fiscal supply higher, the ACM term premium has migrated closer to zero or mildly positive. That makes long real yields “stickier”—they don’t fall as easily just because policy rates inch down. Jackson Hole remarks on balance sheets, r-star, and market structure will therefore be read through a term-premium lens. (Federal Reserve Bank of New York, Liberty Street Economics)

Credit & mortgage channels: how real rates translate to the real economy

• U.S. mortgages: The U.S. housing market keys off the 30-year fixed rate. With real yields high and term premium positive, mortgages have only partly retraced from 2023 peaks and currently print in the mid-6s despite cooling inflation. Affordability is better than a year ago but still historically stretched. (FRED)
• Corporate credit: For IG borrowers, all-in yields combine swap rates (policy expectations + term premium) and spreads (growth risk). In “benign disinflation,” spreads can stay orderly even if long real yields are slow to fall; in “sticky services” or “negative shock,” the long end and spreads can both lean against growth.
• Europe’s bank channel: The ECB’s June step to 2% helps, but pass-through to household and SME lending is mediated by banks’ funding costs and margins. If real rates remain high because term premium is sticky, relief to borrowers will be gradual, not instantaneous. (Reuters)

What the market has already priced

• U.S. cuts: Pricing has shifted toward earlier easing after weaker jobs data, with several houses now flagging September as a live cut; market narratives discuss multiple cuts by early 2026. Jackson Hole can validate or challenge that timeline. (Reuters)
• Europe: The ECB’s path after June depends on incoming inflation and activity. Flash inflation at 2.0% gives cover for patience; officials have publicly set a “very high” bar for additional near-term cuts if the economy holds up. (European Commission, Reuters)

“Two-week dashboard” heading into and out of Jackson Hole

A neutral checklist you can track—no positions implied.

1. U.S. 5y5y breakeven (T5YIFR). A stable 5y5y near the low-2s supports the idea that real-rate moves (not inflation fears) dominate. A lurch higher would complicate the benign path. (FRED)
2. 10-year TIPS yield (DFII10). Watch whether real yields break down through the recent range (~1.8–2.1%) on dovish signals, or re-firm on sticky-services data. (FRED)
3. ACM term premium. A rising premium without a change in policy expectations means long borrowing costs can stay high even as cuts approach. (Federal Reserve Bank of New York)
4. ECB/ Fed OIS path via headlines. Post-symposium reporting often crystallizes how traders reset the meeting-by-meeting path (e.g., Reuters wraps on odds of a September Fed cut; remarks from ECB Governing Council members). (Reuters)
5. Eurostat flash inflation & revisions. A second month at 2.0% (or a downside surprise) would support benign disinflation; upside would revive sticky-services concerns. (European Commission)
6. U.S. mortgages (MORTGAGE30US). If real yields slip but mortgage rates remain stuck, that’s the term premium talking. (FRED)
7. Symposium cadence. The Kansas City Fed’s agenda (keynotes and panel topics) often signals which structural issues—r-star, balance sheets, productivity, supply constraints—will dominate this year’s discussion. (kansascityfed.org)

How to read the speeches

• If the tone is “benign disinflation”: Expect nods to cooling labor markets, patience on cuts that still begin this year, and emphasis on anchored expectations (5y5y). Real yields drift lower, but slowly; growth slows without breaking. (Reuters)
• If “sticky services” dominates: Look for references to underlying inflation, wage momentum, and the risks of cutting too soon. Real yields stay firm; housing and interest-sensitive sectors lag. (Reuters)
• If “negative supply shock” worries surface: Watch for discussions of term-premium volatility, energy shocks, or trade frictions. Real-rate uncertainty rises even if policy paths don’t change immediately.

Bottom line

Real rates—not just policy rates—will do the heavy lifting for growth in late-2025. With long-run expectations anchored, the debate is about the level and stability of real yields and the term premium. A soft-landing “benign disinflation” path would let real yields drift down and ease financing conditions gradually. A “sticky services” detour leaves real rates elevated longer, damping housing and credit. A “negative supply shock” adds volatility and can push term premium higher even without policy tightening.

Jackson Hole won’t settle every question, but it will set the narrative for the real-rate path into autumn. Keep your eye on TIPS yields, the 5y5y, and the ACM term premium, and cross-check them against the evolving OIS paths on both sides of the Atlantic.

Sources

• Jackson Hole details: Federal Reserve Bank of Kansas City, 2025 symposium dates and FAQs. (kansascityfed.org)
• Real yields & inflation expectations: FRED series DFII10 (10-year TIPS yield) and T5YIFR (5y5y inflation expectation). (FRED)
• Term premium background & data: New York Fed ACM term premium page and Liberty Street Economics. (Federal Reserve Bank of New York, Liberty Street Economics)
• Policy-rate outlook and market odds: Reuters coverage of Fed officials and JPMorgan’s earlier-cut call; ECB policy context. (Reuters)
• Euro inflation: Eurostat flash estimates for June and July 2025 (2.0% y/y). (European Commission)
• Mortgage rates: FRED MORTGAGE30US. (FRED)

Disclosure:
This article is for educational and informational purposes only and does not constitute investment or trading advice, an offer, or a solicitation to buy or sell any security or financial instrument. All facts and figures should be independently verified using the cited primary sources; while care is taken, errors or omissions may occur. Markets can change quickly. Past performance is not a guarantee of future results. Consider consulting a licensed financial professional before making any financial decisions.