Christopher Waller, member of the Federal Reserve Board commented US economy today, especially r-star (neutral rate). Waller stance is quite hawkish because higher estimated neutral rate may be a signal, that economy needs higher rates to fight inflation pressures. According to him demographics as well as financing pressure will contribute to rise of the US neutral rate coming years.
Fed Waller
- If US treasury supply begins to outstrip demand, this will put upward pressure on neutral rate. Only time will tell how large a factor US fiscal position will be in affecting the neutral rate.
- The demographics will continue to put downward pressure on the neutral rate. Changes in banking regulations, the role of central banks and sovereign wealth funds and the liberalisation of capital markets is not likely to have a significant impact on raising the neutral rate.
- US financing pressures may contribute to a rise in a longer-run neutral rate in coming years. The demand for US safe and liquid assets outpacing supply over the past 40 years has pushed down treasury yields and the neutral rate.
- The US dollar remains the world's reserve currency by a very large margin. Recent events point more to increased influence for dollar than to any significant decline.
- The real return on capital is not an appropriate interest rate to use to gauge longer-run neutral rate. Real 10-year treasury yield is a good, real-world proxy for theoretical value of the neutral rate. We need to be humble in citing the numerical value of the r*.
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