Trump: Will impose substantial additional tariffs on all countries with digital taxes, legislation, rules, or regulations

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

Members commenced their discussion of international financial conditions with the observation that prices of risky financial assets had remained buoyant, despite continued elevated uncertainty over future tariff policies and the global economic outlook. Equity prices had reached new highs, and equity risk premia and corporate bond spreads remained low, including in Australia. Members noted that it was possible these developments could be justified by fundamentals, including: company earnings reports having generally been positive; fiscal policy settings being broadly supportive of economic activity (particularly in the United States); retaliation against US tariffs having been somewhat lower than initially feared; and a recognition that global monetary policy could provide further support to economic activity if needed. However, an alternative view was that financial markets were too sanguine about risks. If so, sufficiently material or persistent news that contradicted the benign outlook currently priced in by financial markets could trigger heightened risk aversion and a sharp correction in asset prices. Members noted that market participants expected further monetary policy easing in several developed economies, including the United States, the United Kingdom and Australia. In the United States, inflation had remained stable and unemployment was still close to historical lows despite a recent slowing in employment growth. However, tariff and immigration policies and fiscal settings were creating various risks to US inflation and unemployment, at least in the near term. Meanwhile, the Bank of England had reduced its policy rate in August and signalled a gradual and careful approach to further easing, amid upward revisions to its inflation and near-term unemployment forecasts. By contrast, central banks in the euro area, Canada and New Zealand had already reduced interest rates significantly and markets were pricing in only limited further easing by these central banks. In sovereign bond markets in advanced economies, 10-year bond yields had remained broadly unchanged over the previous 12 months, despite some shorter term volatility. However, 30-year bond yields had gradually trended higher in several economies – including the United States, Germany, the United Kingdom and Japan. This was consistent with term premia rising in response to prospects for large def RBA Warns Quicker Rate Cuts Could Be Needed If Labour Market Near Equilibrium and Inflation Lags RBA Minutes: Pace Of Rate Cuts Would Be Determined By Incoming Data, Balance Of Global Risks - Saw Several Arguments For A Gradual Pace Of Easing, And Arguments For A Faster Pace - Labour Market Still Little Tight, Inflation Still Above Midpoint, Domestic Demand Recovering RBA Minutes: Board Saw Strong Case For 25Bps Cut In Cash Rate - Board Judged Some Further Reduction In Cash Rate Likely Needed Over Coming Year - Board Judged Stance Of Policy Was Still Somewhat Restrictive