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Fed’s Williams Says Long-Term Trends Still Back Low Neutral Rate

John Williams (Victor J. Blue/Bloomberg)

(Bloomberg) -- Federal Reserve Bank of New York President John Williams said the longer-term trends that led to declines in neutral levels for interest rates before the pandemic still prevail.

“My own Holston-Laubach-Williams estimates for r-star in the United States, for Canada and the euro area are about the same level as they were before the pandemic,” Williams said Friday on a panel organized by the Central Reserve Bank of Peru, referring to his model’s estimate for the neutral rate which neither stimulates nor slows the economy.

That suggests underlying trends that supported low rates pre-pandemic “are still very much intact,” Williams said.

The New York Fed chief said earlier this week that inflation readings in recent months have been encouraging, but he wants to see more data to be confident it’s headed back to the Fed’s 2% target. He said officials will learn a lot between July and September, when policymakers are widely expected to begin reducing borrowing costs. 

Williams is one of the last Fed officials to speak before they go into a quiet period ahead of their July 30-31 policy meeting. His remarks on the neutral rate play into a debate at the central bank about where interest rates are likely to settle once inflation has returned to 2%.

In June, policymakers published projections showing they believed the neutral rate had risen to around 2.8%, from 2.5% before the pandemic, according to their median estimate.

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