With a host of Federal Reserve officials set to speak throughout the day, it is no surprise that markets have begun to show some signs of intraday volatility.
One of the more interesting speeches, in my opinion, was John Williams’ (president and CEO of Federal Reserve Bank of NY) speech on “Measuring the Natural Rate of Interest: Past, Present, and Future”.
Interestingly, John starts the speech with a quote from economist John Williams in the 1930s:
“The natural rate (R-star, or R*) is an abstraction; like faith, it is seen by its works. One can only say that if the bank policy succeeds in stabilizing prices, the bank rate must have been brought in line with the natural rate, but if it does not, it must not have been.”
John then revisits the 1990s, at which point an assumption of the natural rate of interest (and by extension, inflation targeting) was incorporated in the description of monetary policy rules. “For policymakers, the natural questions—pardon the pun—were: Is 2 percent the right number? Does it change over time? And how would we know? Those were the very questions than then-Federal Reserve Governor Larry Meyer posed to Board staff back in 2000.”
And it seems like those questions have never really been revisited since… In fact, it seems the Fed has long strayed from honestly debating these policies and points. With Core PCE at roughly double the Fed’s target, and CPI levels still very much elevated from Fed targets, this is quite the assertion.
Given the Fed’s comments during this economic cycle, I can’t help but think back to one of my favorite books, “Devil Takes The Hindmost: A History of Financial Speculation” for some context on how these low interest rate speculative cycles usually play out.
