“R-star”: less cherished, but still useful

The latest macro data and the higher confidence shown by the Fed in its mildly reflationary outlook have increased the conviction that rates will continue to increase at a quarterly pace well into next year.

Authors: Paolo Zanghieri


  • Whether and when the Fed will have tightened too much is an issue that is gathering attention: One way to look at it is to compare the level of fed funds rates against the equilibrium short term interest rate (R-star), i.e. the rate consistent with balanced growth. In the past, policy rates rising above R-star preceded a recession by few quarters.
  • R-star is not observable and must be estimated with models. The wide range of estimates raises questions on its value as a gauge of the monetary policy stance and the Fed is downplaying its role. However, we show that it can still provide useful insights, especially on yields and bond-equity correlations.
  • The mild increase in potential growth and the wider fiscal deficit should raise R-star from its historically lows to levels consistent with a nominal rate of around 3%. However, adverse demographic trends will cap its upside potential.
  • Its very gradual and limited increase will widen the gap with respect to the Fed funds rate, resulting in a mildly tight monetary policy.

Read the full publication below.



US President-elect Joe Biden has unveiled a $1.9 trillion stimulus package proposal. Following the recent increase in cases, China has imposed new restrictions and lockdowns in the Hebei province. Canada has implemented new restrictions and a provincewide curfew in Quebec that will last until February 8. German Chancellor Angela Merkel warned that the recent rise in Covid-19 cases could force the country to prolong the nationwide lockdown until April.
Following a monster rally in stocks last autumn, multiples are well above historical averages, but equity investors can count on lingering low yields, tighter credit spreads and increasing central banks’ balance sheets which in turn maintain low the cost of equity and the discount rate of future cash flows.
Video Outlook 2021: Repair and Despair
Watch the Outlook video with Vincent Chaigneau, Head of Research at Generali Investments