Fed’s Daly getting with the jargon now, says doesn’t know if r* has risen

Earlier from Daly is here:


  • We don’t know if R-star (more commonly written by the economists as r*) has risen
  • its reasonable to think r* is between 0.5 and 1
  • Labor force supply increase would be an upside surprise, but I can’t
    count on it to make policy

The term “R star” refers to the natural rate of interest, also known as the neutral interest rate.

  • This is a theoretical concept representing the interest rate that neither stimulates nor restrains the economy when it is operating at full capacity and with stable inflation.
  • The natural rate of interest is important for central banks because it helps them set their policy rates.
  • If the policy rate is above r*, the policy is considered contractionary, which could slow economic growth and lower inflation.
  • Conversely, if the policy rate is below r*, the policy is seen as expansionary, potentially boosting economic growth and raising inflation.
  • Determining the actual value of r* is challenging as it cannot be observed directly. It must be estimated using economic models that consider various macroeconomic factors, such as productivity growth, demographics, and global economic conditions. These estimates can change over time due to shifts in these underlying factors.

This article was written by Eamonn Sheridan at www.forexlive.com. Source