New York Fed’s Williams says pandemic didn’t end era of very low rates

Federal Reserve Bank of New York President John Williams said there is no evidence that the COVID-19 pandemic has ended the era of very low interest rates experienced before the crisis, although growth may be slower in the long run.

The New York Fed chief also said the natural rate, known as r-star — defined as the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable — has returned to levels seen in 2019.  

“The main longer-term consequence from the pandemic period is a reduction in potential output, but the imprint on r-star appears to be relatively modest,” Williams said Friday in remarks prepared for a research conference hosted by the Federal Reserve Board in Washington. “Importantly, there is no evidence that the era of very low natural rates of interest has ended.” 

Some economists have questioned if the U.S. economy will return to the low-rate environment seen in the decade before the pandemic or if higher interest rates would be needed going forward because of stronger inflation or global shifts caused by the pandemic.

Fed officials aggressively raised rates over the past 14 months to fight inflation, bringing the target on their benchmark rate above 5% in May for the first time since 2007. Policymakers are now debating if they should raise rates again at their June 13-14 meeting or allow more time to assess how rate increases are hitting the economy. 

Williams did not comment in his prepared remarks on his near-term outlook for interest rates or the economy. Earlier this week, Williams said officials need to gather feedback about the way the economy is being affected by interest rate increases. 

The policymaker also said the Fed will resume publishing quarterly updates of the estimated natural rate after it was paused during the pandemic. The estimates are based on research Williams did with Thomas Laubach, a senior Fed economist who died in 2020 and who was honored at the research conference. Williams said the work is being carried on with economist Kathryn Holston.