William said, "the neutral interest rates (r-star) in the United States, Canada, and the euro zone are roughly the same as before the epidemic." Economists have lowered their expectations of inflation in the first half of 2025 in the United States and expect unemployment to rise slightly. They expect these factors to prompt the Federal Reserve to begin lowering interest rates.
On Friday (July 19) local time, John Williams, President of the New York Federal Reserve, said that the long-term trend that led to lower neutral interest rates before the epidemic still exists.
Williams said at a meeting organized by the Central Reserve Bank of Peru, "my own Holston-Laubach-Williams model estimated the 'neutral interest rates' (r-star) of the United States, Canada, and the euro zone, and the results showed that the neutral rate of interest is roughly the same as it was before the epidemic. "
Williams explained that this indicates that the potential trend that supported low-interest rates before the epidemic "remains quite intact." Recently, the topic of neutral interest rates has been frequently mentioned by Federal Reserve officials. They want to know what level the central bank interest rate should be withdrawn to when inflation stabilizes back to 2%.
When interest rates are at the neutral level, they will neither stimulate nor suppress economic growth, but will maintain economic operation at the potential growth rate. In June of this year, the Federal Reserve's forecast showed that according to officials' median estimates, the neutral interest rate has risen from about 2.5% before the epidemic to around 2.8%.
Williams is one of the last officials to speak before the end-of-month meeting of the Federal Reserve. From July 30th to 31st, the Federal Open Market Committee (FOMC) will hold an interest rate meeting, which means that officials will begin their silent period starting this weekend.
Earlier this week, Williams revealed that if the current trend of slowing inflation continues, it may be necessary to lower interest rates in the next few months, but may not do so at the meeting in two weeks. As the vice chairman of the FOMC, his words are weighty.
According to a survey published by the media on the same day, economists have lowered their expectations of inflation in the first half of 2025 in the United States and expect unemployment to rise slightly. They expect these factors to prompt the Federal Reserve to begin lowering interest rates.
Specifically, economists interviewed believed that the year-on-year increase in the core personal consumption expenditure (PCE) price index, which is the most favored inflation indicator by the Federal Reserve, excluding food and energy, will reach 2.6% at the end of the year, lower than last month's forecast of 2.7%. The overall PCE price index is 2.4%, lower than last month's 2.6%.
Economists also expect that the average unemployment rate in the fourth quarter will be 4.2%, while last month's expectation was 4.1%. They believe that the probability of an economic recession within the next 12 months is 30%, far lower than the forecast a year ago, but the quarterly growth rate may not exceed 2%.
Kathy Bostjancic, Chief Economist of Nationwide Mutual Insurance Co., said that unless unfavorable inflation data appears in July or August, the Federal Reserve will be prepared to cut interest rates in September. "We believe that looser policies are necessary because the labor market is showing signs of moderation. Lowering interest rates may help to avoid greater and deeper cracks in the labor market. "
Bostjancic said, "We believe that looser policies are necessary because the labor market is showing signs of moderation. Lowering interest rates may help to avoid greater and deeper cracks in the labor market. "
Editor/Somer