Fed Governor Waller speaks and says:
- US financing pressures may contribute to a rise in the long-term neutral rate in the coming years.
- Only time will tell how much the US fiscal situation will influence the neutral rate.
- If the supply of US Treasuries begins to exceed demand, this will put upward pressure on the neutral rate.
- Changes in banking systems, the role of central banks and sovereign wealth funds, and capital market liberalization are unlikely to have a significant impact on raising the neutral rate.
- Demographics will continue to put downward pressure on the neutral rate.
- Demand for safe, liquid assets outstripping supply over the past 40 years has driven down Treasury yields and the neutral interest rate.
- The US dollar remains, by a very large margin, the world's reserve currency.
- Recent events indicate an increase in the dollar's influence more than any major decline.
- The real return on capital is not an appropriate interest rate to use to measure the long-run neutral rate.
- Real 10-year Treasury yields are a good real proxy for the theoretical value of the neutral rate.
- You must be modest in determining the numerical value of the neutral rate.
Through the comments, Waller acknowledges that the US benefits from being the global reserve currency in terms of the neutral rate, but he also acknowledges that there are other things pushing the neutral rate higher. Ultimately, it's just a guess what it is (we have to be modest) as the dynamics of calculus change over time.
This article was written by Greg Michalowski at www.forexlive.com.