In a recent speech, Federal Reserve Board Governor Miran discussed his views on the neutral rate of interest. In a recent paper, he re-estimated r-star at 0.5%. This estimate is strikingly at odds with the prevailing models. Those models typically place the neutral rate at 1% and 0.8%. Miran’s claim has raised the ire of fellow economists and financial analysts.
Miran’s model for how to calculate the r-star is novel and completely opaque, raising many questions about how they arrived at such a methodology. The most common r-star models don’t go below 0.8% at all. Miran’s 0.5% number should raise eyebrows and invite scrutiny. He stated, “My best attempt at a real neutral rate estimate is 0.5%,” emphasizing his confidence in this personal assessment.
Real or nominal—whatever the causes—the implications of a lower neutral rate would be profound. If the r-star is indeed lower than previously thought, this could influence the Federal Reserve’s decisions regarding interest rates and economic growth strategies. Miran, however, is hopeful about receiving additional data prior to the next Federal Reserve meeting in October. These new data could provide useful perspective on our current economic moment.
Miran expressed encouragement at the 4.3 percent economic growth witnessed during the first half of the year. He acknowledged that it all was going slower than planned. He blamed this paltry performance on persistent turbulence in the market, illustrating just how outside factors can halt economic progress. This lack of certainty is directly connected to what is known as the neutral rate of interest. It underscores the importance of recalibrating estimations to guide prudent financial policy.
While economists digest Miran’s argument, the debate over the neutral rate of interest is still very much a live discourse. A lower r-star would have a profound effect on fiscal policy and investor behavior. Stakeholders will find themselves making significant adjustments, as all of us work to understand the realities of a new and fluctuating economic environment.