It's Time to Get R*

Now prepare for a period when we all have R-stars in front of our eyes.

The neutral real rate of interest is back in focus as the shocks from the pandemic and 2008 are finally being worked out of the financial system.

When You Wish Upon an R-Star

Vanguard Group’s chief economist Joe Davis shows how two models from the New York Fed have measured the neutral rate going back to 1960:

What is the neutral real rate of interest, or R* or R-star as economists like to call it?

The most hawkish member thinks the long-term fed funds rate should be 3.75%.

If the most dovish member is right, a long term rate of 2.25%, implying R* is barely above zero.

Anatole Kaletsky, a founder of Gavekal Research, argues:

The high end of this range is likely to be proved right. 

The Fed’s neutral rate estimate of 2.9% effectively assumes that the historically unprecedented low interest rates of the post-2008 crisis period were not a temporary aberration, but a permanent “new normal” that will again become the equilibrium state of the world economy in the years and decades ahead. 

This seems unlikely

John Authers Bloomberg 20 september 2024

https://www.bloomberg.com/opinion/articles/2024-09-20/with-more-fed-cuts-to-come-it-s-time-to-get-r

John Authers is a senior editor for markets and Bloomberg Opinion columnist. Former chief markets commentator at the Financial Times.