I could talk about r-star at great length, but you may be relieved to hear that for the purpose of this speech, there’s just one point I want to make: r-star has fallen, not only in the U.S., but around the world. 1/4  BIS central bankers' speeches  Fundamental shifts have been occurring in the two main drivers of r-star over the past two decades: demographics and productivity growth. Lower fertility rates and aging populations, as well as slower productivity growth, have pushed down r-star by as much as two percentage points in a number of developed nations. These structural shifts are having fundamental effects on real interest rates, growth, and inflation. A number of advanced economies have inflation below desired levels and longer-term interest rates that are well below where they were a decade ago. There are, of course, a few outliers, but the commonalities between the world’s developed economies are becoming more and more apparent. There’s no doubt that the U.S. is experiencing first-hand the effects of the structural shifts in demographics and productivity growth. But the fact that these changes are a common experience for so many developed economies creates challenges to our economic prospects at home. Slowing Global Growth Which brings me to the second trend I highlighted: slowing global growth. This story—of low interest rates, low inflation, and slow growth—is showing up in the data. The latest numbers from the International Monetary Fund (IMF) follow the recent trend of steady downward revisions of growth estimates.
Before I explore issues like inflation in any greater depth, I should give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. The U.S. Economy If monetary policy represents a set of scales, on one side we have a strong U.S. economy with unemployment near a 50-year low, and on the other, a more challenging and uncertain landscape. GDP looks to grow around 2 percent this year, and unemployment has stayed at or near historically low levels, boosted by solid job growth. At the same time, the Federal Open Market Committee (FOMC) has moved to cut rates three times. What’s going on? There are three trends I’ll explore today, which all demonstrate the commonalities and the interconnectedness of the global economy. The first is the low neutral rate of interest, or r-star, the second is slowing global growth, and the third is rising geopolitical tensions. All are critically important to the long-term prospects of the U.S. economy, and each tells an important story about the conditions we’re experiencing today. Low R-star Those of you who know me won’t be surprised that I’m starting with low r-star! The neutral rate of interest—the rate that prevails when monetary policy is neither restrictive nor accommodative— has been an area of study, and a personal passion, for the past two decades.