we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”

 

Methods of estimating so-called R-star are in the spotlight — unfortunately, none are good

On August 25, Federal Reserve chair Jay Powell summarised the mood when he said “we are navigating by the stars under cloudy skies”.

The object everyone is searching for is the neutral rate of interest, or R-star for short.  It is the (real) rate that neither buoys nor depresses the economy once temporary shocks have faded away. 

Central bankers believe that they can neither influence it nor observe it.

 Unfortunately, it - by  Richmond Fed - suffers from statistical error bands the size of a bus. 

Although the median estimate is 2.3 per cent, the lower bound is 1.4 per cent and upper bound is 3.6 per cent. That is about as useful as being told that one’s Friday night pizza will arrive anytime between 6pm and 11pm.

 What if R-star is indeed slow-moving, but the pandemic has revealed that we overestimated its fall during the 2010s? What if the expectations of central bankers and investors feed off each other? 

Soumaya Keynes FT 2 November 2023

https://www.ft.com/content/3c206a67-cd31-4828-94ba-549410d066e4

Soumaya Keynes became economics columnist for the Financial Times after eight years at The Economist where she covered economics, trade and globalisation.

Soumaya won an award for comment from the Society for American Business Editors and Writers. She also co-hosted The Economist's Money Talks podcast and co-founded the Trade Talks podcast.

https://www.ft.com/soumaya-keynes

How Higher Rates for Longer Can Be Good News for the Economy

Belief that the country can weather rates near their current level for the next year is in itself remarkable, suggesting the economy has reserves of strength that at least until recently weren’t adequately appreciated.

In their September projections, policy makers continued to estimate that their target rate will average 2.5% in the longer term—essentially their forecast of the neutral rate. 

Justin Lahart Bloomberg Nov. 2, 2023

https://www.wsj.com/economy/central-banking/how-higher-rates-for-longer-can-be-good-news-for-the-economy-9e13cf36

Powell’s main hawkish line was to say that officials are “prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”

Dots showed a central bank expecting to keep rates higher than it had expected three months ago, and for longer.

The dots even show that 12 of 19 officials favor another rate hike in one of the last two meetings of 2023.

The FOMC also lives in the shadow of the dreadful mistakes of the 1970s, when rates were cut too soon and stagflation resulted.

It seems Powell has really convinced the market that he’s not sure why the economy is still so strong.

Sometimes honesty is the best policy. 

At one point Wednesday afternoon, the markets appeared to be reacting negatively to Jerome Powell of the Federal Reserve, as he admitted to uncertainty — some said confusion — over the direction of the economy. 

Naturally, that’s worrying when it comes from the head of the world’s most powerful monetary institution. But there’s also an element of reassuring believability. If anyone tells me with certainty where the US economy is heading at present, I’m inclined not to trust them. I’m sure many feel the same way. 

And so Powell’s acknowledgement of uncertainty in these strange times seems to have given him more credibility. As a result, his attempt to execute a “hawkish pause” — no change in interest rates while convincing the market that higher rates were more likely in the future — succeeded. Bond yields rose, and stocks fell. 

John Authers Bloomberg 21 September 2023

https://www.bloomberg.com/opinion/articles/2023-09-21/fed-meeting-powell-gets-a-break-as-markets-connect-the-dots

The Federal Reserve’s internal debate about the “neutral” real rate of interest is heating up.

The neutral rate, or r-star, is the inflation-adjusted policy stance that neither stimulates nor restrains the economy. The rate is impossible to observe in real time, yet policymakers have been subtly revising up their estimates of what they think it might be. And some observers are making sensational claims about the significance of the moves.

Jerome Powell doesn’t seem to place much stock in estimates of neutral. In speeches going back to 2018, he has spelled out his cautiousness when dealing with the macroeconomic “star variables” (including r-star and its close relative, u-star, the natural rate of unemployment).

Jonathan Levin Bloomberg 20 september 2023

https://www.bloomberg.com/opinion/articles/2023-09-20/federal-reserve-meeting-debate-about-neutral-heats-up-but-is-still-academic

How long can the world’s borrowers hold on as higher interest rates bite? It all comes down to R-Star

https://englundmacro.blogspot.com/2023/09/how-long-can-worlds-borrowers-hold-on.html

 “the financial stability interest rate” (which they call r**, 

not to be confused with r*, the neutral interest rate) — 

the threshold interest rate above which the central bank triggers a problem of financial stability.

Niall Ferguson Bloomberg 18 december 2022 

https://englundmacro.blogspot.com/2022/12/the-threshold-interest-rate-above-which.html

Fed är beredd att höja räntan ytterligare om det behövs. Powell did not discuss the prospects of a higher R-star on Friday, but...

Powell did not discuss the prospects of a higher R-star on Friday, but said: “we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint”.

Key Takeaways From Fed Chair Jerome Powell’s Jackson Hole Speech

https://englundmacro.blogspot.com/2023/08/fed-ar-beredd-att-hoja-rantan.html

https://englundmacro.blogspot.com/search/label/Star