In prepared remarks, New York Fed President John Williams said the global shifts in demographics and productivity have two important implications for the economy and monetary policy. Firstly, “slower population and productivity growth translate directly into slower trend economic growth”. Secondly, “these trends have contributed to dramatic declines in the longer-term normal or ‘neutral’ real rate of interest, or r-star.”

And, the global decline in r-star will continue to pose “significant challenges” for monetary policy. There will be “limited policy space” for rate cuts in future downturns. Hence, “recoveries will be slow and inflation below target”. Also, the limitation in the ability of central banks to offset downturns results in an “adverse feedback loop”. That is “expectations of low future inflation drag down current inflation and further reduce available policy space”.

Separately, Williams told Bloomberg TV that “as tariffs get larger, assuming that happens, the effects will be bigger, boosting inflation in the next year and probably having negative effects on growth.” “We could probably get a couple tenths or two tenths on the inflation rate over the next year based on what has already been announced. If there (is) further escalation in terms of tariffs, those effects would get even larger”, he added.

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