Notable Rise in Natural Interest Rate
New research from the New York Fed indicates a statistically significant increase in the global natural interest rate (r-star) since 2019, with a rise of approximately one percentage point in the U.S. and other advanced economies. The r-star is a theoretical benchmark that represents the short-term interest rate when the economy is at full employment and inflation is stable, making it a critical indicator for central banks.
Decline in Bond Appeal
The study highlights that the diminishing appeal of government bonds as safe-haven assets may account for about half of the rise in the natural rate. While r-star is a theoretical construct, its shifts offer valuable insights for policymakers. Former references by Fed Chair Powell to r-star as the 'North Star' for monetary policy underline its importance.
Implications for Economic Policy
- Central banks must account for evolving r-star estimates in interest rate decisions
- Reduced investor interest in government bonds could influence market expectations
- The increase in r-star may signal deeper structural changes in the global economy