Investing.com — The case for a rising neutral level of interest rates has yet to meet two key criteria, according to New York Federal Reserve President John Williams.
In prepared remarks at an European Central Bank event in Sintra, Portugal, Williams said recent commentary has suggested that this rate — known as “R-star” — has increased “due to persistent changes in the balance between the supply and demand for savings.”
R-star is the theoretical real short-term interest rate at which inflation is tamed and the economy is at full strength.
However, Williams argued that the value of R-star is very often highly uncertain, adding that an uptick in the figure would have to fulfill two important tests.
First, he said that, because of the interconnectedness of the worldwide economy, the factors pushing up R-star would likely be “global in nature.”
“This highlights a tension between the evidence from Europe that r-star is still very low and arguments in the United States that r-star is now closer to levels seen 20 years ago,” he added.
Second, potential economic output growth, which Williams cited as a major upward influence on R-star, remains near pre-COVID-19 levels in both the U.S. and euro area, instead of moving higher.
“[A]ny increase in R-star must overcome the forces that have been pushing R-star down for decades,” Williams said. “In this regard, recent data reinforce the continuation of pre-pandemic trends in global demographics and productivity growth.”
Williams did not provide any specific commentary on the near-term outlook for monetary policy or the economy, but did say that R-star does not play a critical role in deciding tactical interest rate decisions.
“[S]uch determinations must be, and are, based on a wide range of information and assessments, including those related to risks,” Williams said.
