Responsibility lies with R*
“Dear Brutus, the fault lies not in our planet, but in ourselves, in our lower ranks.”
william shakespeare Did Cassius say these words to Brutus on the feast day of Lupercus, the Roman shepherd god, held at the beginning of the third week of February each year?More or less, that’s the beginning of the plot, and eventually Assassination of Julius Caesar.
John Gielgud (left) as Cassius and James Mason as Brutus in the 1953 film of Shakespeare’s “Julius Caesar.” (John Springer Collection/COBIS/Corbis via Getty Images)
Like many lines in Shakespeare’s plays, this one is often taken out of context and presented as a kind of timeless wisdom illuminated by its association with the Bard. Neither a borrower nor a lender! There’s nothing good or bad about it, but thinking about it makes it that way. Brevity is the spirit of wit. and so on.
Although this is often the case, it should not escape your notice that these lines came from the mouths of highly questionable characters and were not spoken by Shakespeare himself. Polonius, who appears to be a bit of a fool and also Denmark’s chief intelligence officer, advises his son to avoid involvement in the trust. He’s also the speaker for that line about brevity. And he says it in the middle. Shakespeare’s longest play, hamlet.
Cassius attempted a form of suicide during the civil war following Caesar’s assassination, ordering his own men to stab him. The very sword with which he stabbed Caesar. In other words, this defender of human agency over fate ends in a state of fatalistic despair over the outcome of the conflict brought about by his own machinations.
sometimes The mistake is in our star. That is, we can be misled into believing that we can overcome fate through the power of our own agency.
Neutral rate also increases
Or, in the case of the Federal Reserve System, The mistake is probably in r*s. Economists use the abbreviation r* to refer to the neutral, or sometimes “natural” interest rate. This refers to a constantly changing short-term policy rate that is unknown, unobservable, neither accommodative nor restrictive. Those wearing tweed can call it the “long-run equilibrium rate.”
The consensus among those who pay attention to financial economics is that the explanation is a decline in the neutral interest rate. Decline in prevailing interest rates Over the past few decades. The idea is that policy interest rates, which would have been extremely accommodative 10 to 20 years ago, may evolve into capped interest rates as the neutral interest rate declines.
You can see what the Fed considers the neutral interest rate by looking at the following: Long-term expected federal funds rate. The Fed says this long-term interest rate is an interest rate that is compatible with full employment and stable inflation. Over the years, through the Trump boom, the pandemic, the post-pandemic recovery, the Bidenflation episode, and even now, the Fed has kept this pegged at 2.5%.
If the neutral rate is 2.5%, the current federal funds rate of 5.25% to 5.50% looks very restrictive. One reason many analysts expect the Fed to lower its target is because they see this as “normalization,” or a return to much lower, neutral interest rates.If inflation is no longer a threat, there is no need This restrictive rate.
But the performance of the economy throughout the Fed’s recent rate hike cycle is very likely an indicator of what’s next. neutrality rate increased. Even before the pandemic, great economic tycoons like Janet Yellen, Mario Draghi, and Mark Carney; all intimate r* was rising.
The pandemic may have temporarily obscured the evidence, but now it appears the economy can recover Operated with high growth rate At interest rates that would have been considered extremely restrictive in pre-pandemic times.
President of the Federal Reserve Bank of Minnesota Neel Kashkari I made a similar observation in recent essays.
these [recent strong economic] Looking at the data makes us wonder how much downward pressure monetary policy is currently putting on demand.
However, the data is not decidedly positive, with signs of economic weakness such as auto loan and credit card delinquencies increasing from very low levels and continued weakness in the office sector of commercial real estate. I take seriously that there are some.
This body of data suggests that the current stance of monetary policy, including the current level and expected path of the federal funds rate and balance sheet, may not be as tight as expected given the low neutral interest rate. suggests to me that. Pre-pandemic environment. At least during the post-pandemic recovery period, a policy stance indicating neutrality may have increased. What I think this means is that it gives the FOMC time to assess upcoming economic data before it starts cutting the federal funds rate, reducing the risk that policy that is too tight will stifle the economic recovery. thinking.
So while Fed Chairman Jerome Powell and Wall Street believe the Fed will return interest rates to what they think is the neutral rate, r* may have other plans.
