Source: Wall Street
Mr Waller says the US is on an unsustainable fiscal path. If the supply of Treasuries starts to grow faster than demand, that will mean lower prices and higher yields, which will put upward pressure on neutral interest rates.
On Friday, Federal Reserve Governor Waller, the top candidate for the next Fed chairman, saidNewcrouchingtigerhiddendragonHe still believes that neutral interest rates in the US are relatively low, but warns that unsustainable fiscal spending could change that trend.
Mr. Waller said he didn't see any reason to change his view of r * in the short term. However, this may change in the future, which requires close attention.
What Waller means by r * is the neutral interest rate. Neutral interest rate is a theoretical concept that describesNewcrouchingtigerhiddendragonThere are policies that neither stimulate growth nor restrain demand. It can not be observed in real time, and there is great uncertainty in the estimation range. Waller points out that an important fact about r * is that it is a theoretical concept and there is no reliable and direct way to determine its value.
The long-term neutral interest rate r * is a central topic in policy discussions among Fed officials this year. The latest estimates released by Fed officials in March show that their range of estimates for r * is 2.Newcrouchingtigerhiddendragon.4% Mutual 3Newcrouchingtigerhiddendragon.8%.
For now, senior Fed officials are wondering whether America's neutral interest rates have risen because the economy seems to be less responsive to higher rates than they expected. In March, they estimated that the median interest rate was 0.6% after adjusting for inflation, while the current range of the federal funds rate is 5.25% and 5.5%, while one-year inflation is priced at just over 2% in the swap market. Fed policy is supposed to be strongly restrictive, but the US economy is still growing steadily and resilient.
In a prepared speech, Mr Waller said the US was on an unsustainable fiscal path. If the supply of Treasuries starts to grow faster than demand, that will mean lower prices and higher yields, which will put upward pressure on neutral interest rates.
Waller uses the 10-year Treasury yield as an approximation of r * and lists some trends that could drive it down:
To sum up, Waller said, "I don't think any of these factors can explain the recent rise in r *, but some of them may contribute to the rise in r * in the future."
In his speech on Friday, Waller did not comment on the outlook for monetary policy, and the latest speech focused on long-term trends that had previously lowered US interest rates over time, and he discussed the possibility of reversing that trend.
Earlier this week, Waller said that while recent data suggest that progress may have been restored on inflation, he needs to see good inflation data for "a few more months" before starting to cut interest rates. If the data remain weak over the next three to five months, the Fed may consider cutting interest rates by the end of 2024. Mr. Waller said recent price data showed only modest progress in meeting the fed's 2% inflation target, and he rated the latest u.s. CPI report as C +.
Waller's speech attracted a lot of market attention, not least because he is a Fed governor who has the right to vote on FOMC. Earlier this year, Nick Timiraos, known as the "New Federal Reserve News Agency," pointed out that Federal Reserve Governor Waller's accurate judgment of the direction of the US economy two years ago increased his influence, and if Trump is re-elected, Waller may become a strong candidate for the next Fed chairman.
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