(Finance) – “In the last year there has been much discussion whether r* has increased or not“. He stated it Christopher Waller, member of the Board of Governors of the United States Federal Reserve, at an event in Reykjavik, Iceland. Although there are many concepts of r* (also called r-star or natural interest rate), the central banker interprets it as the real policy interest rate that neither stimulates nor limits economic activity with inflation pegged to the inflation target of the central bank.
“Some (factors, ed.) could conceivably contribute to an increase of r* in the future,” Waller said.
Firstly, i demographic data they are such that between 2015 and 2050 the percentage of the world population over 60 will almost double, going from 12% to 22%. This will continue to put downward, not upward, pressure on r*. Second, is it possible that capital market liberalization will be reversed due to growing geopolitical frictions? Maybe, but not yet to a significant extent. Third, are central banks and sovereign wealth funds around the world likely to dramatically reduce their holdings of US Treasuries? Unlikely, although their demand growth may slow.
Finally, it is possible that the regulatory pressures that force financial institutions to hold safer and more liquid public debt withdraw and increase r*? Current regulations are likely to remain and banks will comply with the rules. Therefore, growth in regulatory demand for Treasury securities may slow (rather than increase) substantially.
“But if the growth ofsupply of US Treasury securities begins to outstrip demand, this will mean lower prices and higher yields, which will exert a upward pressure on r*, he argued.
“But only time will tell how important the US fiscal position will be in influencing r*,” he added.
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