On Tuesday, May 14, New York Fed President John Williams spoke at the 9th High-Level Conference on the International Monetary System, hosted by the International Monetary Fund and the Swiss National Bank.
“Given the demographic waves and sustained productivity growth slowdown around the world, I see no reason to expect r-star to revert to higher levels in the foreseeable future.”
“Policymakers around the globe need to prepare for the challenges of navigating the new realities of slow global growth and low r-star.”
“[F]iscal and other economic policies can attack directly the sources of slow growth and low r-star.”
In his speech, President Williams described how bold monetary policy actions — including zero and negative interest rates and asset purchase programs — had played an important role in aiding economic recovery from the global financial crisis. But he noted that during the same period a “sea change in supply-side realities” had taken place.
He explained that “fundamental shifts in demographics and productivity growth” have “important implications for the future of our economies and for monetary policy.” He said that slower population and productivity growth “translate directly into slower trend economic growth,” and illustrated how “these trends have contributed to dramatic declines in the longer-term normal or ‘neutral’ real rate of interest, or r-star.”
President Williams pointed to data from Canada, the euro area, Japan, the United Kingdom, and the United States, which indicate that r-star has declined to half a percent, “2 percentage points below the average natural rate that prevailed in the two decades before the financial crisis.”
He said, “The global decline in r-star will continue to pose significant challenges for monetary policy. Given the limited policy space for interest rate cuts in future downturns, recoveries will be slow and inflation below target.”
Turning to solutions, President Williams said that “central banks should revisit and reassess their policy frameworks, strategies, and toolkits, to maximize efficacy in a low r-star world.” Beyond monetary policy, he said that “raising public and private investment in human and physical capital, infrastructure, science and technology, and policies aimed at removing barriers to participation in the labor force and the economy more broadly” could help us prepare for the future.
This article was originally published by the New York Fed on Medium.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.