Fed's 'neutral rate' guru downplays theory as rates rise

[NEW YORK] The Federal Reserve's point-person on the theory of how high to raise interest rates said on Friday that estimating this "neutral" level is getting more difficult and less relevant as the US central bank continues tightening policy.

"I continue to expect that further gradual increases in interest rates will best foster" the economy and its "very strong" outlook through at least next year, John Williams, New York Fed President, told a forum of economists and students.

As the Fed, which raised its policy rate above 2 per cent this week, continues to hike, "it makes sense to shift away from a focus on normalising the stance of monetary policy relative to some benchmark 'neutral' interest rate, often referred to as 'r-star,'" he said.

The idea of an estimated neutral rate - which leaves inflation and unemployment at equilibrium levels, sometimes called r* - has at times dominated debate over how aggressively the Fed needed to tighten policy in the wake of the recent economic recovery.

Mr Williams was one of the authors of this theory. Yet he said on Friday that it has at times received "too much attention" - sentiment that echoes recent comments downplaying such monetary models by Fed Chair Jerome Powell.

REUTERS