He discussed three variables in his speech: namely, r-star, the natural rate of interest; y-star, the potential GDP; and u-star, which is the level of unemployment when an economy is at its potential.
New York Federal Reserve Bank President John Williams said in a speech late Monday that the era of low real short-term interest rates is far from over.
The Fed official expressed this view in a prepared statement intended to be delivered at the Banco de México Centennial Conference in Mexico City, Mexico. He discussed three variables in his speech: r-star, the natural rate of interest; y-star, the potential GDP; and u-star, the level of unemployment when an economy is at its full potential.
Explaining r-star further, Williams said it is the real short-term interest rate that is expected to prevail when the economy is at full strength and inflation is stable. “The star variables provide key benchmarks for the economy and, in the case of r-star, the stance of monetary policy,” he said.
Williams, however, did not explicitly talk about the U.S. monetary policy outlook in his latest public appearance. Fed Chair Jerome Powell hinted at a potential rate cut at the September rate-setting meeting at his Jackson Hole address on Friday, sending the market higher.
The SPDR S&P 500 ETF (SPY), an exchange-traded fund (ETF) that tracks the S&P 500 Index, and the Invesco QQQ Trust (QQQ) ETF are up 10.28% and 11.85%, respectively, for the year.
On Stocktwits, retail sentiment toward the SPY ETF remained ‘bullish’ by late Monday, with the message volume at ‘normal’ levels. On the other hand, sentiment toward the QQQ ETF has deteriorated to ‘bearish’ amid investor skepticism toward tech stocks, with ‘high’ message volume.
Williams shared three approaches that have emerged to infer r-star from data: using statistical data to extract a long-term trend, analyzing the financial market, or survey data, and examining r-star’s effects on economic data.
According to the regional bank Fed president, model-based estimates of r-star work better. The core assumption of the available models is that aggregate demand depends in part on the difference between the real interest rate and r-star, he said.
“Thus, by observing the movements of demand, real interest rates, and other relevant macroeconomic variables, one can infer the likely value of r-star.”
He favored focusing on global trends affecting r-star rather than differences across countries.
For updates and corrections, email newsroom[at]stocktwits[dot]com.<