Federal Reserve Governor Bowman: The U.S. economy shows strong resilience, and the neutral interest rate may have risen
Federal Reserve Governor Bowman stated that the U.S. economy has shown strong resilience since the COVID-19 pandemic, and the neutral level of the policy interest rate may have risen. She pointed out that low borrowing costs and active fiscal policies have helped stabilize the economy, despite the Federal Reserve's significant interest rate hikes in 2022 and 2023. Bowman believes that population growth, the rise of new technologies, and new businesses have boosted investment demand, and the stability of fiscal policy has also increased savings demand. The Federal Reserve remains focused on bringing the inflation rate down to the 2% target
According to the Zhitong Finance APP, Federal Reserve Governor Bowman stated that the neutral level of the Federal Reserve's policy interest rate may have risen since the COVID-19 pandemic. Bowman pointed out that for a period after the outbreak, low borrowing costs and aggressive fiscal policies helped stabilize the U.S. economy, even as the Federal Reserve significantly raised interest rates in 2022 and 2023, the economy still demonstrated strong resilience. She believes these factors may have led to an increase in the so-called neutral interest rate (R-star). The neutral interest rate refers to the level of the Federal Reserve's policy interest rate that neither stimulates nor suppresses economic activity.
At an event hosted by the University of Chicago Booth School of Business in New York on Friday, Bowman stated, "The resilience of economic activity to high interest rates in the recent round of monetary tightening can be explained by the rise in R-star." Additionally, she mentioned that population growth, the emergence of new technologies, and the rise of new businesses have all contributed to increased productivity, which may have boosted investment demand. She added, "Moreover, the lack of significant tightening in fiscal policy has also increased the demand for savings. An economy with strong investment demand and low household savings requires a higher equilibrium interest rate compared to pre-pandemic levels."
Federal Reserve officials significantly raised interest rates in 2022 and 2023 and recently indicated that there may not be significant rate cuts before the end of 2024, suggesting that the Federal Reserve remains focused on bringing the inflation rate down to the target level of 2%. Bowman stated, "As we continue to move toward the 2% target, I expect that the labor market and economic activity will play a more important role in the Federal Open Market Committee (FOMC) policy discussions."