The natural rate of interest is an important economic concept that signifies the point of equilibrium for the interest rate, at which inflation remains stable. It serves as a crucial benchmark for policymakers to determine the appropriate stance of monetary policy. Additionally, the natural rate plays a significant role in influencing the sustainability of public debt. Higher interest rates compared to the natural rate can strain government finances as servicing debt becomes more expensive.
The Federal Open Market Committee (FOMC) judges that an inflation rate of 2% in the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. This implies that economic growth of 2.5% and an inflation rate of 2% in the long term can help optimize growth-employment with the lowest level of inflation, indicating that monetary policy is neither stimulating nor restricting economic growth.
Quarles Says 3% Inflation Target Would Hurt Fed Credibility
Former Federal Reserve Vice Chair for Supervision Randy Quarles explains why it is important for the Federal to stick to its 2% inflation target, which it reaffirmed as part of a comprehensive review of the monetary policy framework just before the inflationary surge began.
If the Federal Reserve considers a real interest rate of 2% to 2.5%, the 10-year Treasury yield may be between 4.2% and 5%. This forecast is based on the 5-year/5-year forward inflation expectation (T5YIFR) of 2.2% to 2.3%, and an expected term premium of 0.22% (as of 24-03-01, it is zero).
I Posted 3M ago:
✅️Commodities may begin a new bull market as a hedge against persistent inflation. The low levels of volatility could be an indication supporting a rebound on it.
📈Strong services inflation + core inflation 4% + unemployment 3,7% (LFP below 63%) + wage-price spiral + high prices for commodities + persistent shelter = sticky inflation for 2024.
✅️High rates for longer and I do not expect rate cuts before 4Q24.