Key underlying interest rate could rise in the future

Investing.com — A major underlying interest rate could increase in the future, although it is too early to tell if this will come to pass, according to Federal Reserve Governor Christopher Waller.

Speaking from prepared remarks at an event in Iceland, Waller, who is seen by analysts as one of the most prominent voices on the U.S. central bank, said there has „been a lot of debate” around whether or not so-called „R-star” has increased.

R-star has been interpreted as the supposed level of interest rates that neither stimulates nor restricts the economy and leaves inflation anchored at the Fed’s target pace. While it is widely viewed as an uncertain figure, it has also been seen as a tool to help assess the impact of monetary policy at a given time.

Recently, Fed officials have been openly wondering if R-star is set to move higher, particularly as economic activity in the U.S. has remained resilient despite an extended period of elevated interest rates. If this were to be the case, then it could signify the start of a new era of higher borrowing costs.

One central factor Waller addressed was increased demand for Treasury debt issuance versus supply. Should growth in the supply of U.S. Treasuries begin to outstrip demand, he argued, „more upward pressure” may be placed on R-star. However, he flagged that „only time will tell how large a factor the U.S. fiscal position will be in affecting R-star.”

In his speech, Waller did not comment on short-term inflation trends or the outlook for interest rates in the run-up to the rate-setting Federal Open Market Committee’s next monthly meeting.