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REPEAT:MNI:Fed's Williams Throws Cold Water on R-Star Optimism

(MNI) WASHINGTON
Repeats Story Initially Transmitted at 17:10 GMT May 15/13:10 EST May 15
By Jean Yung
     WASHINGTON (MNI) - Incoming Federal Reserve Bank of New York President John
Williams reaffirmed his long-held views on the historically low level of the
neutral rate of interest Tuesday, noting that optimism over its potential to
rise amid new economic tailwinds is "misplaced." 
     The economist and thought leader on the topic continues to estimate that
the real neutral rate sits at around 0.5%, meaning the longer run fed funds rate
is roughly 2.5%. That is among the most pessimistic views on the Federal Open
Market Committee. 
     It would also mean that the Fed's policy rate would hit neutral in the next
year, as Williams said he backs three to four quarter-point hikes this year and
expects rates to continue rising next year. The FOMC in March predicted the fed
funds rate would hit 2.1% by the end of the 2018 and 2.9% by end-2019. 
     Demographics, productivity growth and global demand for safe assets
underpin r-star, Williams said. Despite speculation that fiscal stimulus would
create incentives to invest in capital equipment and research and development,
the resulting effect on r-star is likely to be "relatively modest," he said.
That's because the Republican tax cuts are front-loaded and could serve to bump
only U.S. growth. 
     At the same time, he has yet to see data that indicates current strong
economic conditions have increased the appetite for riskier assets, he said. 
     "Even as we raise rates, I'm conscious that the fundamental drivers that
govern r-star are lower than we've seen in the past," he said. "With a new
normal for short-term rates of around 2.5 percent, interest rates are likely to
remain low relative to historical experience." 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
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