I was interested to see that this week’s “Free Exchange” is about estimating the natural rate of interest (R*). The Economist points out that one way to infer the Fed’s views is to subtract the target inflation rate from the dot plot projection of long run interest rates. In their September 18th update of the 19 officials involves there were 11 different forecasts (ranging from 2.38% to 3.75%). They point out a 2021 paper by Claudio Borio (which you can read here) which finds a notable increase in attention for the natural rate from top policymakers.

Borio also has a 2024 paper surveying various estimates (read it here) which are summarised in this chart:

The key takeaway seems to be that a lack of consensus around these estimates should make policy makers wary of relying on it as a consideration. Indeed The Economist concludes:

Aiming for an imaginary and almost certainly false variable is just as likely to hurt as to help. In that sense, the collapse of consensus in the Fed’s r-star projections is welcome. It is a form of intellectual honesty.

But this just begs the question - then what instead? I think monetary aggregates have proven a useful guide throughout the recent inflation but this view is contested. Indeed any criticism of how central bankers attempt to conduct monetary policy should consider the fact that it may be a fool’s errand overall. After all, the best response to nihilism is to accept defeat and give up.