Federal Reserve Bank of New York President John Williams on what he believes is a reasonable estimate of the neutral rate of interest.
Seems very low …
More:
- Neutral rate levels haven’t really changed much in a while
- Acknowledges economists see slower growth outlook relative to markets
- Financial conditions are pretty supportive of growth
- Current Fed policy is likely to lower inflation, modestly weaken job market
—-
Obviously the FOMC is holding rates much higher than this estimate from Willaims . This is due to concerns about a renewed rise in inflation.
Earlier from Williams:
- NY Fed Williams says current moderstly restrictive monetary policy is appropriate
- More from Fed’s Williams – blames tariffs for high inflation running above target
more to come
—
The term “R star” refers to the natural rate of interest, also known as the neutral interest rate.
- This is a theoretical concept representing the interest rate that neither stimulates nor restrains the economy when it is operating at full capacity and with stable inflation.
- The natural rate of interest is important for central banks because it helps them set their policy rates.
- If the policy rate is above r*, the policy is considered contractionary, which could slow economic growth and lower inflation.
- Conversely, if the policy rate is below r*, the policy is seen as expansionary, potentially boosting economic growth and raising inflation.
- Determining the actual value of r* is challenging as it cannot be observed directly. It must be estimated using economic models that consider various macroeconomic factors, such as productivity growth, demographics, and global economic conditions. These estimates can change over time due to shifts in these underlying factors.
This article was written by Eamonn Sheridan at www.forexlive.com.
