MNI BRIEF: Fed's Rate Hikes Blunted By Higher R-Star - Bowman
MNI (WASHINGTON) - The impact of the Federal Reserve's extraordinary tightening cycle in recent years was blunted because of various factors that led to a rise in the neutral rate or r-star, Fed Governor Michelle Bowman said Friday.
"One way to describe the resiliency of real activity to higher interest rates during the recent tightening cycle is to say that some of the previously noted factors led to a rise in r-star," she said in remarks for the University of Chicago Booth School of Business 2025 U.S. Monetary Policy Forum. "Higher population growth, from the influx of new immigrants, and higher productivity growth, arguably from the use of new technologies like artificial intelligence and the surge in new business formations, especially in high-tech industries, have likely boosted investment demand."
She added that the lack of significant fiscal consolidation in recent years has also increased demand for savings. "An economy with stronger investment demand and very little household savings likely requires a higher equilibrium interest rate relative to pre-pandemic norms." (See: MNI PODCAST: FedSpeak: Ghamami Sees Higher R-Star On Deficits)
Bowman said that "although the FOMC has been focused on lowering inflation in the past few years, as we continue to make progress on approaching our 2% target, I expect that the labor market and economic activity will become a larger factor in the FOMC’s policy discussions."