Williams warns low r-star means more frequent lower bound constraints on policy effectiveness.
“A low r-star implies the economy can encounter more frequent and longer periods when monetary policy is constrained by the effective lower bound on nominal interest rates, potentially impeding the achievement of a central bank’s inflation goals and other macroeconomic objectives.”
Williams cautions policymakers against placing too much confidence in precise r-star estimates when making decisions.
“Although these estimates are useful for analysis and transparency, policymakers are well advised to avoid placing too great confidence in precise estimates of the stars in making real-world assessments and decisions.”
Williams cautions that overconfidence in r-star estimates risks unmooring inflation expectations.
“Given the wide range of uncertainties, acting as if one knows the star variables when making policy can lead to persistent deviations of inflation from the target that risk unmooring inflation expectations.”
Williams says U.S. r-star models show only a modest quarter to half point increase since 2018.
“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.”