More Fed officials ready to say goodbye to low-rate world

• A growing number of Federal Reserve officials don't see a return to the ultra-low interest rates that prevailed before the COVID-19 pandemic due to everything from ballooning federal deficits to demand for investments in green energy, artificial intelligence and domestic manufacturing.
• The U.S. economy has held up remarkably well in the face of the stiffest rate hikes in a generation, with unemployment low and growth mostly above trend until recently. Meanwhile, progress on returning inflation to the Fed's 2% target has stalled out this year after rapid gains last year, leading some to wonder whether something has changed that could require a generally higher level of interest rates to keep price increases in check.
• The heads of the Dallas and Cleveland regional Fed banks, for instance, sense something new is afoot. In April 2024, Dallas Fed President Lorie Logan, noted seven policymakers saw a longer-run policy rate of 3%, up from three with that view a year ago. Meanwhile, Cleveland Fed President Loretta Mester, raised her longer-run fed funds estimate "to reflect the continued resilience in the economy despite high nominal interest rates and higher model-based estimates of the equilibrium interest rate, R-star."
• To be sure, the shift seen in March's projections was small, and some like Fed Chair Jerome Powell cautioned against reading too much into it at this stage. Likewise, New York Fed President John Williams, a leading researcher into the R-Star concept has contended he expects a return to a low-rate world at some point.

(Source: Reuters)