On Friday (July 19th) local time, John Williams, the President of the New York Federal Reserve, stated that the long-term trend that led to the neutral interest rate falling to lower levels before the pandemic still exists.
My own Holsten Laubach Williams model estimated the 'neutral interest rate' (r-star) in the United States, Canada, and the eurozone, and the results showed that the neutral interest rate was roughly the same as before the pandemic, "Williams said at a meeting organized by the Central Reserve Bank of Peru
Williams explained that this indicates that the potential trend of supporting low interest rates before the pandemic was still quite intact. Recently, the topic of neutral interest rates has been frequently mentioned by Federal Reserve officials, who want to know at what level the central bank's interest rate should be withdrawn when inflation stabilizes at 2%.
When interest rates are at a neutral level, they neither stimulate nor inhibit economic growth, but rather maintain the economy operating at its potential growth rate. In June of this year, the forecast released by the Federal Reserve showed that according to the median estimate of officials, the neutral interest rate would rise from 2.5% before the pandemic to around 2.8%.
Williams was one of the last officials to give a speech before the end of month meeting of the Federal Reserve. On July 30-31, the Federal Open Market Committee (FOMC) will hold a rate meeting, which means officials will enter a period of silence this weekend.
Earlier this week, Williams revealed that if the recent slowdown in inflation continues, it may be necessary to cut interest rates in the coming months, but it may not be done at the meeting two weeks later. As the Vice Chairman of the FOMC, his words carry a lot of weight.
Recently, a survey released by the media showed that economists have lowered their expectations for inflation in the first half of 2025 in the United States and expect the unemployment rate to slightly rise. They expect these factors to prompt the Federal Reserve to start lowering interest rates.
Specifically, interviewed economists believe that the year-on-year increase in the Federal Reserve's most favored inflation indicator, the core personal consumption expenditure (PCE) price index excluding food and energy, will reach 2.6% by the end of the year, lower than last month's forecast of 2.7%, and the overall PCE price index will be 2.4%, lower than last month's 2.6%.
Economists also expect an average unemployment rate of 4.2% in the fourth quarter, compared to last month's expectation of 4.1%. They believe that there is a 30% chance of an economic recession occurring within the next 12 months, which is much lower than the forecast from a year ago, but the quarterly growth rate may not exceed 2%.
Kathy Bostjancic, Chief Economist of Nationwide Mutual Insurance Co., stated that unless there is unfavorable inflation data in July or August, the Federal Reserve will be prepared to start cutting interest rates in September.
Bostjancic said, "We believe that looser policies are necessary because the labor market is showing signs of easing. Lowering interest rates may help avoid larger and deeper cracks in the labor market