Are Financial Markets Good Predictors of R‑Star?

Sophia Cho and John Williams

No 20250825, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Recently, there has been renewed attention on the natural rate of interest—often referred to as “r-star”—and whether it has risen from the historically low levels that prevailed before the COVID-19 pandemic. The natural interest rate is the real (inflation-adjusted) interest rate expected to prevail when supply and demand in the economy are in balance and inflation is stable. Some commentators claim that the prior decline in r‑star has reversed, pointing to the recent rise in future real interest rates implied by the bond market. But before declaring the death of this “low r‑star” era, a natural question to ask is: how reliable are market-based measures of r‑star? In this Liberty Street Economics post, we evaluate whether such measures provide additional information on future real interest rates beyond what is already contained in macroeconomic model-based estimates of r-star. Our findings suggest they do not, and we conclude that reports of the death of low r-star are greatly exaggerated.

Keywords: natural rate of interest; Holston-Laubach-Williams model; Treasury Inflation-Protected Securities (TIPS); term structure models; macroeconomic models; Blue Chip survey (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 (search for similar items in EconPapers)
Date: 2025-08-25
New Economics Papers: this item is included in nep-fdg and nep-mon
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