Williams' Comments Point To Steady Longer-Run "Dot"

The key takeaway from NY Fed Pres Williams' speech today is his announcement that the Fed will resume publication of their r-star (real natural rate of interest) estimates which they abandoned in 2020 due to COVID shocks which threw off the model.

• While the headlines say Williams didn't comment on current monetary policy, it certainly would have been impactful if he had said his estimate of r-star had changed substantially, and thus potentially impacting where the FOMC saw longer-run Fed funds in the quarterly Dot Plot (which since mid-2019 has been 2.5% - or roughly 0.5% r-star plus 2% inflation).
• But a paper published today co-authored by Williams that updates the r-star estimate, finds that for the US/Canada/Eurozone they saw little change (within 0.2pp of the 2019 estimates).
• Williams notes that r-star for the US was about 0.5% in Q1 2023, and using private sector economic forecasts as inputs, the model indicates that it "subsequently falls to slightly below zero" in the quarters ahead. While Williams notes that the pandemic's fallout may have impacted on r-star by reducing potential output, he says the effect is modest, and "there is no evidence that the era of very low natural rates of interest has ended."
• He said in the post-speech Q&A that it's possible the r-star estimate could rise again, but this was qualified by saying this could arise from an unexpected upward productivity shock, etc, rather than anything he's seeing now. And r-star estimates "are very imprecise and subject to real-time measurement error."
• Given Williams' conclusion that no major changes to r-star is warranted for the post-pandemic era, it's doubtful any adjustments to the Dot Plot longer-run median is likely any time soon.

Source: NY Fed