By Michael S. Derby

(Reuters) – Federal Reserve Bank of New York President John Williams said on Wednesday that the level of interest rates that’s neutral in its impact on the economy likely hasn’t risen much.

Williams was taking stock of what economists refer to as R-Star, the real neutral rate of interest that balances the economy in the long run. This variable helps determine whether monetary policy is stimulating or restraining the economy.

Some economists believe it has risen due to changes in the economy following the coronavirus pandemic, but Williams was skeptical.

“Although the value of R-Star is always highly uncertain, the case for a sizable increase in R-Star has yet to meet two important tests,” Williams said in the text of a speech prepared for a European Central Bank Conference in Sintra, Portugal.

“Any increase in R-Star must overcome the forces that have been pushing R-Star down for decades,” Williams said, adding “in this regard, recent data reinforce the continuation of pre-pandemic trends in global demographics and productivity growth.”

Williams said that R-Star was not a big factor in tactical monetary policy decisions.

“The high degree of uncertainty about R-Star means that one should not overly rely on estimates of R-Star in determining the appropriate setting of monetary policy at a given point in time,” he said.

Williams did not comment on the outlook for monetary policy and the economy in his prepared remarks.

(Reporting by Michael S. Derby; Editing by Christina Fincher)

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