Wishing Upon An R-Star

Fed officials lately have been talking a lot about “r*”—that ideal level of the federal funds rate that would represent just enough restrictiveness for economic growth without undesirably high inflation or unemployment. R* would be a great monetary policy tool if only it could be pinpointed. But as a notional concept that’s not easily measured, its utility is limited. Today, Eric presents a primer on r*, explaining the variables affecting it and how the Fed’s view of where r* lies affects monetary policy. Some Fed policymakers are theorizing that r* has risen in the post-pandemic era, which explains the economy’s imperviousness to higher interest rates. That would suggest comfortability with “normal-for-longer” interest rates.