Gita Gopinath

So that's more problematic because it's just generating our star without generating the higher growth that should come with it.

And that can be a problem.

From a policymaker's perspective, of course, you have to firstly be able to tell what is driving the R-star.

Is it a good kind or is it a bad kind?

But regardless, if R-star is drifting up and you have an inflation target of 2%, you are looking at higher nominal interest rates.

So right now, the Fed has an R-star forecast of about 1%.

If you put 2% inflation on top of that as their target, we're looking at 3% nominal rates, which is a clear shift away from what it used to be pre-pandemic.

Then you have to check to see whether the R-star increase is actually slowing the economy down or the increase in your nominal rates are slowing the economy down and how much higher than that R-star do you have to be to be able to bring inflation down?

Because there is obviously above target inflation in the U.S.

at this moment.

That is now the big question, whether the air productivity boom is going to mean that you don't need that much of a above R-star interest rate or not.

Do we have too many other forces coming from energy prices passing through into core inflation, the lesser, lower levels of immigration in the country, just general trade disruptions, supply chain disruptions?

And those are the main drivers in which case maybe you need to keep interest rates even higher.

So being able to tease that apart is, you know, I think that's where the tough decisions are.

But what is clearly the case is that we are looking at high nominal interest rates, regardless of whether our star is coming from the good kind or the bad kind.

So this is about making a distinction between now and what comes next.

Now, clearly, it is about the high levels of investment.

There is absolutely a scenario where we could be in that wonderful place with high productivity growth.

At the same time, we don't have civil unrest or rogue forces using AI for ill.

That is a scenario, but I do not know a single person who will put a probability on that scenario and say that that's going to happen forever.