Powell Has Already Hinted at Where He Stands on ‘Neutral’
The Fed chair’s early Jackson Hole speeches indicate a lot about how he thinks about the equilibrium real rate of interest.
Fed Chair Jerome Powell is likely to remain cautious and wait on the data.
Photographer: David Paul Morris/Bloomberg
Central bankers generally believe in an abstract phenomenon known as the neutral real rate of interest, or r-star. It’s the inflation-adjusted rate that should prevail when the economy is balanced with price increases subdued and the labor market healthy.
When inflation is too high, policymakers move rates above neutral to rein it in; when employment is too low, they bring rates below neutral to stimulate the economy and foment job creation. It’s a central concept in monetary policy, but no one ever knows exactly where neutral is in real time.