Powell Has Already Hinted at Where He Stands on ‘Neutral’

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.

For better or worse, some economists now have a hunch that r-star might be rising in the US — perhaps because of demographics, persistently large deficits, or other factors. On the Federal Reserve’s rate-setting committee, the median participant still ballparks it at around 0.5%, but the latest quarterly survey of Fed participants suggests that a few of them now think it has moved up, as the following chart shows. If true, that would have meaningful implications for where the Fed must ultimately take policy rates to cover the last mile in the inflation fight as well as where longer-term Treasury yields will settle (they recently touched the highest since 2007).

Where's R

That brings us to this year’s Kansas City Fed symposium in Jackson Hole, Wyoming, which is appropriately dubbed “Structural Shifts in the Global Economy.” Given the title, investors seem eager to hear what Fed Chair Jerome Powell thinks of the r-star debate when he takes to the dais for his annual policy speech.

But Powell has already revealed a lot about his views on r-star — starting with his debut lecture in Jackson Hole five years ago. Here are a couple takeaways from Powell’s early Jackson Hole speeches that hint at where he stands on the equilibrium real rate of interest.