US Interest Rates May Stay Higher for Longer as R-Star Surges

The Federal Reserve's estimates of the neutral real interest rate, known as r-star, have increased from 1.36% in the first quarter of 2025 to 1.65% in the second quarter of 2026.

This change is significant because r-star represents the real short-term interest rate consistent with an economy operating at full strength and inflation remaining stable.

The New York Fed's Laubach-Williams and Holston-Laubach-Williams models define r-star as the real short-term interest rate expected to prevail when the economy is at full strength and inflation is stable.

Federal Reserve officials have cautioned against treating r-star as a precise policy benchmark, noting that estimates of the economy's 'stars' are imprecise and subject to revision.