Federal Reserve's "Three Hands": The era of low neutral interest rates "seems far from over"

Federal Reserve "big three", New York Fed President Williams said on Monday that the neutral interest rate of the U.S. economy may be very close to the level before the epidemic, given that structural factors limiting interest rates have not disappeared. Williams said, "The global demographic and productivity growth trends that have pushed r-star down have not reversed." Economists typically refer to the so-called "neutral interest rate" as "r-star", which is the level of interest rates that neither stimulates nor restrains economic growth. Williams said that statistical estimates of the neutral interest rate since early 2025 show that the rate has not seen a significant rebound, suggesting that the "low r-star era seems far from over". Given signs of weakness in the labor market, Federal Reserve Chairman Jerome Powell opened the door for a rate cut in September last Friday. So far this year, the Fed has kept the federal funds rate unchanged due to concerns that the Trump administration's tariff policies would push up inflation. Currently, the target range for the federal funds rate is between 4.25% and 4.5%, and differing estimates of the neutral interest rate by policymakers could lead to debates on the extent and pace of rate cuts. Forecasts released in June showed that the median estimate of Fed officials for the neutral interest rate was 3%, higher than the pre-epidemic rate of 2.5%. However, the estimated range fluctuates between 2.5% and close to 4%. Williams did not give his estimate of the neutral interest rate on Monday, nor did he comment on policy or economic prospects. Last month, he said that given the inflation threat from tariffs, a "moderate tightening of monetary policy stance is entirely appropriate".