Peter Williams on Interest Rates, Term Premium, and the Importance of Inflation Expectations

This episode explores the complexities of interest rates, Treasury markets, and monetary policy, featuring insights from Peter Williams, Managing Director of Macroeconomic Research at 22V Research. Against the backdrop of the unexpected absence of a recession in 2022 despite widespread predictions, Williams attributes this resilience to robust nominal income growth and the lingering effects of fiscal policy. More significantly, the discussion delves into the challenges of forecasting in an environment where traditional cyclical relationships are disrupted. For instance, Williams highlights the difficulty of disentangling term premiums from expected interest rates in real-time analysis. As the conversation pivoted to R-star (the neutral real interest rate), Williams emphasizes the importance of considering its implications for monetary policy, particularly its proximity to the zero lower bound. In contrast to the complexities of R-star estimation, Williams suggests using a broader range of macroeconomic data for more stable estimates. Finally, the episode concludes with a discussion on inflation expectations, their influence on policy decisions, and the challenges of predicting the future path of inflation, emphasizing the uncertainties surrounding the "last mile" to the Fed's 2% inflation target.