US New Home Sales Dip in July: Macroeconomic Headwinds Keep Buyers on the Sidelines

Good afternoon. It’s a privilege to be a part of the celebration of Banco de México’s Centennial. I was especially honored when Governor Rodriguez asked me to discuss a favorite topic of mine—and one that economists have obsessed over for even longer than a century. Of course, I am talking about r-star, the natural rate of interest. What’s fascinating about variables like r-star is that while they are unobservable, they go to the very heart of monetary theory and practice. Just as the septillion stars we cannot see are vital to the existence of the universe, the constellation of economic stars is critical to our understanding of the economic universe we inhabit. Today I will address three questions pertaining to the importance, measurement, and use of time-varying unobservable variables at central banks. While I will focus primarily on r-star, I should emphasize from the start that most of what I’ll talk about is applicable to a range of variables—including the closely related u-star and y-star. My remarks will center around the stars from a “longer-run” perspective—that is, the “normal” values expected to prevail after cyclical fluctuations have fully played out and the economy is expanding at its trend rate in the absence of upward or downward pressures on inflation. Before I go further, I’ll provide the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or any others in the Federal Reserve System. FED’S WILLIAMS: DATA DOES NOT SEE NOTABLE RISE IN R-STAR INTEREST RATE LEVEL DATA SUGGESTS UNDERLYING LOW-RATE WORLD PERSISTS POLICYMAKERS SHOULD BE CAUTIOUS ABOUT USING R-STAR ESTIMATES FED’S WILLIAMS DOES NOT COMMENT ON MONETARY POLICY OUTLOOK