Peter Williams on Interest Rates, Term Premium, and the Importance of Inflation Expectations
Mar 4, 2024
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Explore the market perspective on interest rates, term premiums, and monetary policy with Peter Williams. Learn about estimating term premiums, the future of R-star, the importance of inflation expectations, and more in this insightful discussion.
Market perspective on interest rates and Treasury markets
Importance of fiscal policy in maintaining economic stability
Challenges in estimating and adapting to changes in R-Star
Deep dives
Market Perspective on Interest Rates and Monetary Policy
Peter Williams, a managing director of Mackerel Economic Research at 22V Research and a former IMF and World Bank economist, shares insights on interest rates, treasury markets, and monetary policy. He discusses his transition from academia to the private sector, highlighting the different perspectives and challenges. Williams emphasizes the importance of considering the market's reaction to data releases and Fed meetings, indicating the market's focus on short-term horizons compared to policy or academic settings.
Impact of Fiscal Policy on Resilience and Nominal Income Growth
Williams discusses the resilience of the economy and the absence of a predicted recession despite various recessionary indicators like weak housing markets and financial stress. He attributes this to factors like higher nominal income growth providing buffers for firms and households, the legacy of fiscal policy measures supporting household wage growth and stimulating the services sector. Williams notes the importance of recognizing the role of fiscal policy in maintaining economic stability, particularly in challenging times.
Challenges in Modeling Term Premium and Interest Rates
Williams raises caution regarding term premium models, highlighting the complex interplay between expected interest rates and term premiums, especially during extreme rate environments. He discusses the difficulty in disentangling both components in real time and advises to assess models against actual macroeconomic data for accuracy. Williams reflects on his paper's macroeconomic approach to term premium and suggests incorporating survey-based methods for more robust assessments of structural dynamics affecting term premiums.
Navigating by the Stars: Understanding R-Star and its Significance
Addressing the concept of R-Star in monetary policy, Williams acknowledges the challenges of estimating and adapting to changes in R-Star over time. He emphasizes the relevance of R-Star in guiding Fed policies and market considerations, despite criticisms and uncertainties surrounding its accurate determination. Williams underscores the importance of monitoring R-Star, given its influence on policy decisions and economic forecasts in navigating market uncertainties.
R-Star Estimates and Business Cycle Analysis
Estimates of R-Star have seen fluctuations post-COVID, indicating a move away from the zero lower bound policy stance. The paper discussed in the podcast focuses on the importance of not just R-Star estimates but also analyzing the broader changes in the economy post-GFC. By incorporating additional macroeconomic data beyond traditional inputs, the paper aims to provide more stable and real-time estimates of parameters like R-Star and trend productivity growth.
Inflation Expectations and their Complexity
Inflation expectations play a crucial role in economic decision-making, but accurately estimating them is challenging due to various factors like short-term noise and changing consumer survey responses. The episode delves into the complexity of measuring inflation expectations, highlighting the need to consider data from multiple sources like household surveys, market indicators, and institutional reactions. Future challenges include navigating through short-term inflation spikes, assessing the impact of policy shocks on long-run expectations, and addressing the limitations of traditional macroeconomic models in forecasting long-term inflation trends.
Peter Williams is a managing director of macroeconomic research at 22V Research and was formerly at the IMF and the World Bank. Peter joins David on Macro Musings to provide a market perspective on interest rates, Treasury markets, and monetary policy. Specifically, David and Peter discuss the dos and don’ts of estimating term premiums, the importance and future of R-star, the usefulness of inflation expectations, and a lot more.