Federal Reserve Governor Michelle Bowman said the neutral level for the central bank’s policy rate had likely risen since the Covid-19 pandemic.
Bowman said several factors that prevailed immediately after the pandemic’s onset, such as low borrowing costs and supportive fiscal policy, had allowed the US economy to remain on mostly solid footing even after the Fed aggressively raised interest rates in 2022 and 2023.
Those same factors, she said, likely led to a rise in the so-called neutral rate — the Fed policy level that neither promotes nor restricts economic activity. Economists refer to this level as R-star.
“One way to describe the resiliency of real activity to higher interest rates during the recent tightening cycle is to say that some of the previously noted factors led to a rise in R-star,” Bowman said Friday in remarks prepared for an event in New York hosted by the University of Chicago Booth School of Business.
Bowman also said investment demand has likely been boosted by factors such as population growth and a jump in productivity due to new technologies and business formations.
“In addition, the lack of significant fiscal consolidation has also increased demand for savings,” Bowman said. “An economy with stronger investment demand and very little household savings likely requires a higher equilibrium interest rate relative to pre-pandemic norms.”
Inflation Expectations
Speaking at the same event, New York Fed President John Williams said there is no evidence inflation expectations became “unmoored” after the pandemic, citing research being presented at the conference that studied how consumers’ outlooks were affected by the inflation shock caused by the crisis.
“These results suggest that respondents expect an inflation shock will gradually decay over the ensuing years,” Williams said in his prepared remarks. “In particular, although inflation shocks are expected to have persistent effects on inflation, these effects are expected to largely dissipate after five years.”
The New York Fed chief did not comment on his outlook for the economy or on the outlook for interest rates in his prepared remarks. But his comments come amid increased focus on inflation expectations and how consumers could react to any price increases caused by President Donald Trump’s tariffs on America’s largest trading partners.
Williams said earlier this week that he expects tariffs to boost inflation later this year, and he doesn’t see a need to adjust monetary policy at the moment.
Job Market
Fed officials’ rate-hiking campaign in 2022 and 2023, along with their recent signals that they will likely hold rates steady for now after a series of cuts in late 2024, highlight their focus on slowing inflation to the central bank’s 2% objective.
“As we continue to make progress on approaching our 2% target, I expect that the labor market and economic activity will become a larger factor in the FOMC’s policy discussions,” Bowman said, referring to the rate-setting Federal Open Market Committee.
Data out earlier Friday showed US employers added 151,000 jobs in February, while the unemployment rate edged higher to 4.1%.
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