caribbeanstud| Federal Reserve Governor Waller: Factors driving the decline in neutral interest rates may reverse

Federal Reserve Governor Christopher Waller said the decline in neutral interest rates over time may be due to significant changes in global demand for safe assets, butcaribbeanstudHe warned that unsustainable fiscal spending could change that trend.

"The United States is on an unsustainable fiscal path," Waller said in a speech at an economic conference in Reykjavik, Iceland on Friday."If the supply of U.S. Treasuries starts to grow beyond demand, it will mean falling prices and rising yields, putting upward pressure on neutral interest rates."

The Fed governor did not comment on the near-term prospects for monetary policy.

Fed officials have made long-term neutral interest rates a core topic in policy discussions this year. The long-term neutral interest rate is what economists call "r-star."

Neutral interest rates are a theoretical concept that describes a policy environment that neither stimulates growth nor slows demand. It cannot be observed in real time, and there is great uncertainty in the prediction. The latest forecast range released by Fed officials in March was 2caribbeanstud.4% to 3.8%.

"An important fact about r-star is that it is a theoretical concept and there is no reliable, direct way to determine its value," Waller said.

Waller focuses on the U.S. 10-year Treasury yield as an alternative indicator for r-star and lists several trends that may drive it down:

Lower inflation and economic volatility make it more attractive to hold longer-term U.S. Treasuries;

Liberalization of global capital markets has helped increase demand for safe, liquid assets such as U.S. Treasury bonds, pushing down yields;

Increase in dollar assets held by official foreign institutions such as central banks and sovereign wealth funds;

Domestic demand for U.S. Treasurys has increased as retirees demand safer and more liquid assets, regulations require banks to hold more liquid securities, and central banks have increased their holdings.

"I don't think these factors explain the recent potential increase in r-star, but it is conceivable that some of these factors could drive a future rise in r-star," Waller said.