Bruno Bertez, 22 September 2026

Recent public remarks by leading central bankers mark a notable shift in official language.

The concept of the natural or equilibrium real interest rate — commonly known as r-star or R* — is being treated with greater caution and, in some cases, openly downplayed as a practical guide for policy.

Federal Reserve Chair Kevin Warsh has described estimates of the neutral rate as “useful academically” but not relevant to current decision-making.

European Central Bank President Christine Lagarde has similarly reduced emphasis on the concept.

These statements come after years in which r-star served as a key reference point for assessing whether policy was restrictive or accommodative.

What R* Was Meant to RepresentR* is defined as the real interest rate consistent with an economy operating at full potential and with stable inflation.

When the policy rate stands above this level, monetary conditions are considered tight; when below it, they are considered easy.

The idea traces back to Knut Wicksell and later informed frameworks such as the Taylor rule.In the post-2008 and post-pandemic period, central banks frequently invoked r-star to justify low or negative rates, large-scale asset purchases, and forward guidance.

It provided a seemingly objective benchmark in an environment of abundant liquidity and subdued inflation.

Why the Concept Is Losing Prominence

Several practical difficulties have become harder to ignore.R* cannot be observed directly. It must be inferred from models whose results differ widely depending on specification, data vintage, and assumptions.

Estimates have shifted over time and often appear to be revised after the fact to remain consistent with the policy path already chosen.

Structural changes have further complicated the picture. Large-scale public deficits, a surge in private investment linked to artificial intelligence and related infrastructure, geopolitical tensions affecting energy and supply chains, and evolving demographics all influence the balance between saving and investment.

These factors make historical estimates less reliable as a guide for current conditions.As a result, policymakers are placing greater weight on incoming data — inflation readings, labor-market tightness, financial conditions, and fiscal developments — rather than on a single unobservable equilibrium rate.Implications

The reduced reliance on r-star does not mean interest-rate policy has become arbitrary. It does mean that communication is becoming more data-dependent and less anchored to a single theoretical construct.

Markets will need to interpret a broader set of signals rather than treating changes in estimated r-star as decisive.Higher observed real rates and rising long-term yields already reflect this adjustment. Whether the new environment proves more stable or more volatile will depend on how successfully central banks manage the transition away from a framework that had become central to their public narrative.

The concept of a natural rate remains a useful analytical device in textbooks and research. Its role as an operational totem of policy has, however, clearly diminished.