Powell Says Cannot Estimate R-Star With Great Precision

Q: Re r-star: what if it were higher coming out of the COVID crisis? Could the Fed be underestimating r-star and what would be the impact?

• A: It would mean interest rates would run higher by that amount. That would be a good thing from the standpoint of the economy because it would give the Fed more room to cut rates. The problem with interest rates being close to the lower bound is that it cuts into our ability to react to a downturn.
• For example, a pandemic. If you look at the ECB, their policy rate was well below zero when the pandemic hit. We don't want to be in a place where we can't react. A higher neutral rate would be from that narrow standpoint a good thing for us. It would give us more room. That would tend to result in better outcomes for the economy over time.
• You can't estimate it with great precision. I we would be alert to studying r-star as a whole industry unto itself and we would be alert to factors that might raise r-star. We would try to keep up with that. We are all thinking about that and the possibility of that. There are a lot of stories right now that could essentially lead to higher productivity growth and higher r-star. We don't know which of those stories will come true.