Mickey Levy, in his op-ed “The Fed’s Latest Problem: A Strong Economy”, indeed suggests that the natural real rate of interest, or r-star, is above 0.5%5. The natural rate of interest is the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable1.
However, it’s important to note that the Federal Reserve’s estimate of the natural real rate can vary. For instance, Federal Reserve economists Kathryn Holston, Thomas Laubach, and John Williams estimated the real (or inflation-adjusted) neutral rate at about 0.6% in the United States as of the second quarter of 202315.
As for the economic output since the financial crisis, it has been observed that the economy has grown moderately, yet the path of economic recovery has been fragile and uneven12. The U.S. nonfarm business sector experienced a cumulative loss in output due to the labor productivity slowdown since 200513.
Therefore, while your assertion that the natural real rate could be a full percentage point higher than the Federal Reserve’s estimate is plausible, it’s also contingent on a variety of factors including economic conditions, monetary policy, and other macroeconomic indicators. It’s a complex issue that continues to be the subject of ongoing research and debate among economists.
