Renowned economist Claudia Sahm recently shared her insights on the upcoming Jackson Hole symposium, emphasizing the significance of the neutral rate of interest and its implications for the Federal Reserve’s monetary policy.
What Happened: Sahm, in a series of tweets, delved into the intricacies of the neutral (natural) rate of interest, often referred to as R-star. She described it as the federal funds rate where the Fed remains passive, with optimal growth, 2% inflation, and maximum employment – a state she termed as the “Nirvana rate.”
Dampening enthusiasm on Federal Reserve Chair Jerome Powell’s upcoming speech, she said he will “strive to be as boring as humanly possible.”
She further elaborated on the elusive nature of R-star, noting that while it remains unseen and variable, economists strive to deduce it from the economy’s performance. Sahm highlighted the contributions of John Williams, a leading scholar on R-star and the President of the New York Fed, urging readers to refer to his recent discourse on the subject.
Addressing the trajectory of productivity, Sahm pointed out the decline in productivity growth over the past two decades, emphasizing its implications for the Fed’s R-star and the global economy at large.
While acknowledging potential arguments for increased productivity due to work-from-home trends and artificial intelligence, Sahm expressed skepticism about the magnitude and ubiquity of these effects.
She also highlighted factors that could diminish productivity, such as an aging population and the adverse impacts of climate change, citing recent severe weather events as examples.
In her concluding remarks, Sahm expressed disappointment that the Jackson Hole symposium’s discussions predominantly revolve around the Fed, especially when the theme is structural. She emphasized that fiscal policymakers should also have a platform akin to Jackson Hole, given their influence on structural matters.
Why It Matters: Sahm’s insights come at a pivotal time when the global economy is undergoing significant transformations.
The Jackson Hole symposium, scheduled from August 24-26, is expected to focus on “Structural Shifts in the Global Economy.”
Sahm’s emphasis on the neutral rate of interest and its implications for monetary policy provides a perspective on the challenges and considerations the Federal Reserve faces.
With the symposium playing a crucial role in shaping global central banking events, Sahm’s observations underscore the importance of understanding structural economic shifts and their broader implications.
Her tweets also resonate with the sentiments expressed during previous symposiums, where Federal Reserve Chair Powell highlighted the challenges of inflation and the complexities of monetary policy.
Photo: Courtesy of International Monetary Fund on Flickr
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