Key Underlying Interest Rate May Increase in the Future

Investing.com — A significant underlying interest rate may rise in the future, though it is still too early to determine if this will actually happen, according to Federal Reserve Governor Christopher Waller.

During prepared remarks at an event in Iceland, Waller, regarded as a leading voice within the U.S. central bank, noted that there has been considerable debate regarding whether the so-called “R-star” has increased.

R-star is understood as the level of interest rates that neither stimulates nor restricts economic growth, effectively keeping inflation aligned with the Fed’s target. Although it is generally regarded as an uncertain figure, it serves as a useful tool for evaluating the impact of monetary policy at any given time.

Recently, Federal Reserve officials have been speculating about the potential for R-star to rise, especially as U.S. economic activity continues to demonstrate resilience despite a prolonged period of high interest rates. Should this occur, it could indicate the onset of a new phase characterized by higher borrowing costs.

Waller highlighted the growing demand for Treasury debt issuance in relation to supply. He suggested that if the supply of U.S. Treasuries were to outpace demand, it could create “more upward pressure” on R-star. However, he cautioned that “only time will tell how significant a factor the U.S. fiscal position will be in influencing R-star.”

In his remarks, Waller did not address short-term inflation trends or the interest rate outlook ahead of the upcoming Federal Open Market Committee meeting.