Powell Faces Big Question Mark In Natural Rate: Eco Research Wrap

Call them the star wars.

Debate is heating up over whether the Federal Reserve’s neutral interest rate -- commonly called r-star -- is about to head higher, and America’s monetary policy outlook hinges on who has it right.

In one corner, San Francisco Fed President John Williams and his co-authors think long-term factors are holding down the interest rate that neither stokes nor slows growth, so the Fed will have to stop lifting rates this cycle at a historically low endpoint. In the other, Goldman Sachs chief economist Jan Hatzius thinks the recent decline owes to cyclical factors and could reverse meaningfully, allowing the Fed to lift rates higher next year.

The intellectual showdown is relevant as Jerome Powell heads to Capitol Hill Tuesday for his first testimony as Fed Chair, and as central bank-watchers look eagerly for hints about how the new chief expects r-star to evolve.

In honor of Powell’s big day, we're leading off this week's economic research wrap with a summary of the recent neutral-rate literature, from both viewpoints. We also look at computerization and wages, a hopeful sign for rent relief, and babies as a recession indicator. Check this column each week for the latest economic studies from academics, central bankers, and Wall Street research desks.