Yahoo Finance Fed’s Williams Says Estimates Show ‘Low R-Star Regime Endures’
(Bloomberg) -- Federal Reserve Bank of New York President John Williams, who has deeply researched the natural rate of interest known as r-star, pushed back against recent commentary that it has risen since the pandemic.
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In remarks prepared for a panel discussion at the European Central Bank forum in Sintra, Portugal on Wednesday, Williams cited recent estimates that place r-star in the US and euro zone near to where they were before the outbreak of Covid-19.
“Although the two sets of estimates display some shorter-term wiggles, the dominant shared feature is the sustained two percentage-point decline in r-star over the past 30 years,” he said. “The same pattern is true of our estimates for Canada. Hence, according to these estimates, the low r-star regime endures.”
The New York Fed chief reiterated a view he shared in May that there was “no sign” the neutral rate had risen in data so far this year.
The idea of a long-run natural rate of interest, which prevails when the economy is not responding to shocks and is growing at its potential, is central to monetary policy but cannot be directly observed. Officials aim to raise rates above the neutral level to cool the economy and fight inflation.
The resilience of the economy has prompted discussions about whether the neutral rate has risen since the pandemic — and if monetary policy is not as restrictive as previously thought.
Officials in June lifted their estimates of where rates will settle in the longer term to 2.8%, from 2.6% at the March gathering, according to the median projection. The increase followed a slight bump in March. Minutes from the June meeting will be released later Wednesday.
In a discussion following his prepared remarks, Williams said officials will know over time if artificial intelligence will provide a meaningful boost to productivity or if the effect will be more muted. Faster productivity growth could lead to a higher neutral rate amid increased demand for capital.
The Fed official said that given the challenges with measuring the neutral rate, officials should not rely on their estimates of r-star when setting monetary policy.
“The high degree of uncertainty about r-star means that one should not overly rely on estimates of r-star in determining the appropriate setting of monetary policy at a given point in time,” he said.
--With assistance from Reade Pickert.
(Adds additional details starting in fourth paragraph.)
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