MNI: Fed's Williams Says R-Star To Stay Low In Key Economies

A prolonged period of low neutral interest rates appears likely to persist for the foreseeable future across major world economies because of weaker growth in population and productivity, Federal Reserve Bank of New York President John Williams said Monday. 

In prepared remarks at a Banxico conference, Williams said that "the global demographic and productivity growth trends that pushed r-star down have not reversed."

"Two powerful demographic trends have affected r-star: People are generally living longer, and birth rates are declining," Williams said. "Amid these demographic shifts, the growth in global labor productivity—the amount produced per worker hour—has slowed."

The comments echoed the views of a New York Fed blog published earlier Monday, of which Williams was a co-author. "The combination of slowdowns in population and productivity growth implies a slower rate of trend GDP growth and therefore less demand for investment to support a growing economy than before." 

"Of critical importance, the GDP-weighted estimates of r-star for these four economies—Canada, the Euro Area, the United Kingdom, and the United States—are around half of a percent, similar to the comparable real-time estimates from the period prior to the onset of the pandemic," Williams said. 

"This finding that r-star has not meaningfully rebounded is in line with evidence from a variety of models of r-star in the U.S., which show a relatively modest increase of one quarter to one-half of a percentage point in real-time estimates of r-star between the third quarter of 2018 and the first quarter of 2025. Based on this evidence, the era of low r-star appears far from over."