FOMC May Have To Reconsider R-Star

Some of KC Fed Pres George's comments late Monday stood out, in particular her observation that strong fiscal stimulus means "the landscape could unfold quite differently than the one that shaped the thinking around the revised monetary policy framework".

• The implication of this is that in contrast to the decades of low inflation/modest fiscal impulse that preceded the Framework changes in 2020, the Democratic sweep of Congress and the White House has led to much stronger fiscal stimulus than was envisaged when the Framework was being drafted and has been a "game changer" for the growth, inflation and interest rate regime.
• MNI's Policy Team today published a piece citing several ex-Fed officials who likewise saw the Framework being tested by incoming economic data. Ex-Vice Chair Kohn for instance asked ""whether fiscal policy reverses some of that decline in r-star" seen in previous decades - referring to the "natural rate" of interest.
• The Williams (of NY Fed)-Laubach measure of real r-star dropped to +0.029% in 2Q 2020, but this series was suspended amid data volatility in the pandemic. The FOMC's Longer-Run median dot offers a rough approximation at 2.50% (with median PCE inflation expected at 2.0%, this implies an 0.50% real r-star), but this has remained unchanged since the June 2019 FOMC.
• We haven't seen much reconsideration by the FOMC of its estimate of r-star - this might become an area of inquiry for officials in the months to come.

Source: NY Fed, Federal Reserve, MNI