'Say, isn't that r-star?'

John Williams speaking today at an event at Binghamton University today said “Looking ahead, based on my current forecast for the economy, I expect that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time. With this progress toward achieving price stability, moving toward a more neutral monetary policy stance will help maintain the strength of the economy and labor market.”

The problem with this commentary is that the Fed itself doesn’t even know what the ‘neutral’ (r*) rate should be. Jay Powell has said multiple times that he’ll know it when he sees it. Pre Covid, their econometric models spit out a .50% REAL neutral rate ASSUMING inflation was running at 2%. Historically, the spread of the fed funds rate to inflation has been around 200-250 bps but sometimes with higher inflation.