The Moving Star: R* and the G7 in 2026
An In-Depth Analytical Report on the Shifting Neutral Rate of Interest
Prepared for the G7 Évian Summit, June 2026 | Updated through 30 May 2026
Executive Summary
The neutral rate of interest — r*, the real policy rate consistent with full employment and stable inflation — has become the single most contested macroeconomic variable in the G7 heading into the Évian Summit of June 2026. The question of whether r* has structurally migrated upward from its post-2008 lows, or whether cyclical forces are temporarily mimicking a structural shift, now divides central banks, finance ministers, and academic economists with unusual sharpness.
Three developments since the original analytical framework established in early 2026 have materially altered the landscape:
First, the outbreak of the Iran War in late February 2026 introduced a significant supply-side shock that simultaneously re-ignited inflation across the G7 and complicated the classic interpretation of growth resilience as evidence of a higher neutral rate. With oil prices surging above $115 per barrel at the conflict's peak and Brent crude still trading near $96 per barrel as of late May, central banks face an environment in which tighter policy may be necessary not because r* has risen but because a cost-push shock has revived inflationary dynamics that were themselves fading.
Second, Kevin Warsh was confirmed as Federal Reserve Chair on 13 May 2026, by the narrowest Senate margin in Fed history (54–45). Warsh's arrival — and the simultaneous end of Jerome Powell's chairmanship — closes the institutional episode of direct political pressure on the Fed but opens a new phase of policy uncertainty. Warsh inherited a deeply divided FOMC: four dissents at the April meeting, the highest since 1992.
Third, Chicago Fed President Austan Goolsbee delivered a landmark theoretical intervention at the Bank of Japan–IMES Conference on 27 May 2026, presenting an argument with direct implications for r* that directly challenges the Warsh–Treasury view that AI is unambiguously disinflationary. Goolsbee's framework demands careful integration into the Bayesian scenario analysis that informed the earlier version of this report.
This report updates the prior analysis through 30 May 2026, incorporates all three developments, and presents revised scenario weights and policy implications for G7 leaders meeting at Évian.
I. The Landscape as of May 2026: What Has Changed
The Iran War Supply Shock
The outbreak of conflict between the United States, Israel, and Iran in late February 2026 represented the single most consequential new variable to enter the r* debate since the original analysis. The Strait of Hormuz — through which approximately 20 per cent of global oil trade transits — was disrupted, sending oil prices to $115 per barrel at the peak before a fragile ceasefire brought partial relief. As of late May, WTI crude was trading near $90 per barrel and Brent near $96 — levels that remain substantially above the pre-war baseline.
The inflationary consequences have been swift and material. US headline CPI rose to 3.8 per cent year-on-year in April 2026, driven by energy costs and supply-chain pass-through from higher fuel prices. The OECD revised its G20 inflation forecast to 4 per cent for 2026 and projected US inflation reaching 4.2 per cent if the disruption persists. The Federal Reserve Bank of Dallas modelled an upward revision of 0.6 percentage points to headline PCE inflation and 0.2 percentage points to core PCE, even under the cautiously optimistic scenario of a single-quarter disruption. Oxford Economics projected headline CPI could reach above 4 per cent by April.
This supply shock matters profoundly for the r* debate. It introduces precisely the dynamic that Goolsbee later articulated more formally: an energy shock reduces potential output in the near term while simultaneously intensifying the inflation consequences of any demand-side impulse — including the anticipated-productivity impulse from AI. The supply-shock exacerbates rather than displaces the r* problem.
The FOMC Under Transition
At its April 2026 meeting, the FOMC held the federal funds rate at 3.50–3.75 per cent, having cut rates by a total of 175 basis points during 2024 and 2025 from the post-tightening peak of 5.25–5.50 per cent. The March 2026 Summary of Economic Projections showed the median FOMC participant projecting a nominal long-run federal funds rate of 3.1 per cent — implying a real neutral rate of approximately 1.1 per cent against the 2 per cent inflation target. That represents a modest but meaningful upward revision from the December 2025 median of 3.0 per cent.
The April meeting was the most divided in more than three decades. Four of twelve voting members dissented from either the rate decision or the policy statement — a level of internal fracture that reflects genuine, substantive disagreement about whether the current stance is restrictive, neutral, or inadequate. The Cleveland Fed's Zaman model, which estimated with 77 per cent probability that policy was in restrictive territory as of mid-2025, faces a different calculus in May 2026: with inflation re-accelerating and oil prices elevated, markets had priced virtually zero probability of any further rate cuts before year-end.
Kevin Warsh was sworn in as Chair on 15 May 2026. His confirmation testimony directly addressed the r* debate: he testified that President Trump had never asked him to pre-commit to any rate decision, and stated his commitment to price stability. Despite having been nominated partly on the expectation that he would cut rates toward neutral, Warsh inherited an environment where JPMorgan Chase strategists and other institutions considered that rates would remain on hold through the remainder of 2026, with a possible rate hike in early 2027 if inflation proves persistent.
The irony is sharp: Warsh was selected by an administration that consistently argued rates were "far too high" — an implicit claim that r* was substantially below the prevailing policy rate. He now chairs a committee where many members believe rates may need to rise.
The St. Louis Fed Update on r* Estimates
A May 2026 Economic Outlook note from the Federal Reserve Bank of St. Louis confirmed that r* estimates across models continued to diverge markedly as of Q4 2025. The highest estimate — derived from 10-year-forward TIPS rates — placed real r* above 3 per cent. The lowest estimate, from the Holston-Laubach-Williams model, remained below 1 per cent. The FOMC's own median projection, at 3.1 per cent nominal (approximately 1.1 per cent real), sits in the middle of this range but is itself the product of 19 committee members whose individual projections span well over 100 basis points.
The St. Louis Fed note confirmed that all major estimates tend to move in the same direction over time, even when they diverge substantially in level — a finding that supports the Bayesian framework: directionally, r* has moved higher; the dispute is about the magnitude and permanence of that shift.
II. Goolsbee's Theorem: A Critical Analytical Addition
The most intellectually significant development for the r* debate in the weeks before the Évian Summit was Austan Goolsbee's remarks at the Bank of Japan–IMES Conference on 27 May 2026 in Tokyo, and his contemporaneous remarks at the Milken Institute Global Conference.
Goolsbee's argument deserves careful explication, because it resolves an apparent paradox that had been left unaddressed in earlier analysis: why might AI investment raise r* even if AI ultimately reduces inflation?
The Unexpected vs. Anticipated Productivity Distinction
Goolsbee began with the historical benchmark of the 1990s technology boom. Alan Greenspan's famous insight in the mid-1990s was that productivity growth had already begun even though the official data had not yet captured it. This was, critically, unexpected productivity growth. The economy was producing more efficiently before anyone had priced in the windfall — and the consequence was genuinely disinflationary. The supply side expanded faster than demand; rates could remain lower without generating inflation.
The situation in 2026 is structurally different. The AI productivity narrative is not a surprise. It is pervasive, priced into equity markets, embedded in corporate investment plans, discussed in every boardroom and central bank. The widespread anticipation of future productivity gains from AI creates a wealth effect today — even before any actual productivity materialisation. Households and firms that believe they will be wealthier in the future consume and invest more today. This shifts demand forward in time, generating inflationary pressure in the near term before the supply-side benefits of AI have actually arrived.
As Goolsbee said in Tokyo: "Future increases in productivity that make us rich may fuel high equity prices that they are an increase in your wealth today, to know that you're going to be rich sometime in the future. That can encourage people to spend out of this wealth in the stock market or others, and before the AI has actually increased the productivity, you can overheat the economy in the near term."
The policy implication is direct: if AI expectations are being priced into behaviour today, rates may need to be higher, not lower, to prevent near-term overheating — even if the long-run supply-side impact of AI is ultimately disinflationary. In Goolsbee's framework, the bigger the AI hype, the higher rates may need to go. This is not a condemnation of AI; it is a description of how expectations, if sufficiently credible and widespread, generate demand-pull inflation before the supply response materialises.
The Supply-Shock Complication
Goolsbee added a critical second element: the ongoing oil shock from the Iran War makes the anticipated-productivity inflation problem worse, not better. A supply shock — whether from oil, tariffs, or supply chain disruption — reduces potential output in the near term. When a negative supply shock coincides with demand stimulus from AI-wealth effects, the resulting inflation pressure is more severe than either would generate independently. Central banks face a simultaneous reduction in what the economy can produce and an increase in what it is trying to spend — a stagflationary configuration.
This is the most direct challenge to the Warsh–Treasury framework, which holds that AI-driven productivity gains are disinflationary and therefore create space for rate cuts. Goolsbee's argument is that the anticipation of future AI productivity, combined with near-term supply constraints from the Iran shock, creates conditions that more closely resemble 1999 to 2000 — when the Fed raised rates six consecutive times — than the mid-1990s era of supply-led growth.
Implications for r*
Goolsbee's framework has a precise implication for r*: if anticipated future productivity gains generate demand stimulus today, then equilibrium short-term rates must be higher today to prevent overheating — even holding the long-run structural r* constant. In the language of the Bayesian scenario analysis, Goolsbee's argument shifts probability mass toward Scenario III (High Neutral / New Paradigm) in the near term, but through a demand channel (anticipated wealth effects), not through the structural supply-side mechanism of actual TFP improvement. This is a significant analytical distinction: the r* elevation may be self-limiting if and when AI productivity actually arrives and shifts the supply curve outward, at which point the demand anticipation premium would deflate.
But in 2026, before that productivity materialises in the data, the implication is rates should remain firm.
III. Updated Bayesian Scenario Analysis
The original four-scenario Bayesian framework, developed in early 2026, assigned prior probabilities to Secular Stagnation Persistence, Moderate Structural Shift, High Neutral/New Paradigm, and Fiscal Dominance Break. The following signals have arrived since that framework was established and warrant a systematic update to the scenario weights.
Updated Signals
Iran War Oil Shock (February–May 2026) — The shock reduces near-term potential output, raises headline inflation, and complicates monetary easing in all G7 economies. Under the Goolsbee framework, it amplifies the inflationary impact of anticipated AI productivity gains. This signal simultaneously raises the near-term r* (through the supply shock and anticipated-productivity inflation mechanism) and adds uncertainty to the medium-run path. Net effect on scenario weights: modest downward pressure on Scenario I (secular stagnation seems less plausible when inflation is re-accelerating); upward pressure on Scenario III in the near term; ambiguous for Scenario II and IV depending on resolution.
FOMC March 2026 SEP (Long-run dot: 3.1% nominal) — The upward revision from 3.0 per cent to 3.1 per cent, while modest, continues the incremental official acknowledgement that the neutral rate has drifted higher. This is consistent with the base case (Scenario II) but does not confirm Scenario III.
St. Louis Fed Multi-Model Comparison (May 2026) — The confirmed persistence of the cross-model range (below 1% to above 3% real) validates the Bayesian framework's emphasis on distributional uncertainty rather than point estimates. The Holston-Laubach-Williams model's reading of below 1 per cent real continues to argue for significant weight on Scenario I, even as market-implied signals push higher.
Bank of Japan rate at 0.75% (April 2026) — The BOJ's steady-state position, with three board members advocating a rise to 1.0 per cent, confirms that Japan's neutral rate remains genuinely near its policy rate — the clearest evidence in the G7 that Scenario I conditions can persist for extended periods.
ECB Rates Unchanged at 2.0% (March 2026) — The ECB held rates and described its current level as effectively neutral for the euro area. The Iran War complicated the picture: the ECB now faces upside inflation risks from energy and downside growth risks simultaneously. ING analysis suggested the ECB may hike rates once in response to the inflation impact, which would represent a reversal of the 2024–2025 easing cycle.
Goolsbee Tokyo Remarks (27 May 2026) — As discussed above, this introduces an anticipated-productivity-inflation mechanism that is relevant to Scenario III in the near term: AI hype can push r* higher even before AI productivity materialises. This raises the probability weight on Scenario III without confirming the structural permanence of the shift.
Warsh confirmation and FOMC fracture (May 2026) — The most divided confirmation vote in Fed history and four dissents at the April FOMC meeting raise the institutional risk premium on US monetary credibility. This incrementally increases the Scenario IV (Fiscal Dominance Break) tail probability, though it does not confirm the scenario.
Revised Posterior Estimates
Incorporating the above signals into the Bayesian framework:
Scenario I — Secular Stagnation Persistence | Revised Weight: ~15% (from 20%)
The Iran War and Goolsbee's anticipated-productivity channel both argue against this scenario in the near term. The HLW model continues to produce a reading near 1 per cent, and Japan's experience remains an important cautionary prior — but with inflation running at 3.8 per cent in the US, the secular stagnation hypothesis faces its most difficult near-term evidence in years. Revised real r* range: 0.50–0.90 per cent.
Scenario II — Moderate Structural Shift / Base Case | Revised Weight: ~45% (unchanged)
The base case remains the probability-weighted centre of mass. It accommodates both the genuine structural investment impulse from AI and green transition and the near-term complication from the Iran shock, treating the latter as a temporary, if persistent, supply disruption that does not permanently alter the equilibrium. The FOMC's revised median long-run dot of 3.1 per cent nominal is broadly consistent with Scenario II. Revised real r* range: 1.25–1.75 per cent.
Scenario III — High Neutral / New Paradigm | Revised Weight: ~28% (from 25%)
Goolsbee's anticipated-productivity-inflation mechanism provides an additional theoretical channel through which near-term r* is elevated. Combined with the Iran shock's near-term supply constraints, elevated AI capital expenditure (US hyperscalers on track for approximately $400 billion in 2025), and continuing fiscal deficits above 6 per cent of GDP, the case for a high neutral in the 2.00–2.50 per cent real range is somewhat stronger than in February. Revised real r* range: 2.00–2.50 per cent.
Scenario IV — Fiscal Dominance Break / Tail Risk | Revised Weight: ~12% (from 10%)
The Warsh transition introduces new institutional uncertainty. The most divided FOMC in over three decades, a new chair navigating between political pressure for rate cuts and an inflation environment arguing for restraint, and US fiscal deficits projected to remain above 6 per cent of GDP through the presidential term, all incrementally raise the Scenario IV probability. Note that Scenario IV does not require outright fiscal dominance — it captures the broader tail risk of a breakdown in the neutral-rate framework's operational coherence.
Probability-weighted posterior real r (US): approximately 1.45–1.70 per cent*
This is a modest upward revision from the earlier estimate of 1.40–1.65 per cent, primarily reflecting the Goolsbee mechanism and the slightly higher FOMC long-run dot. The directional message is clear: r* has durably shifted above the post-2008 lows, and near-term policy rates should remain elevated relative to the pre-2022 calibration — but the magnitude of the shift remains genuinely uncertain, and the Iran shock represents a temporary additional complication layered atop a structural transition that is still incomplete.
IV. G7 Country Divergence: Updated Assessment
United States
The US presents the strongest case for elevated r* — both structurally (AI capital expenditure, fiscal deficits, demographic relative youth within the G7) and cyclically (anticipated AI wealth effects, Iran shock pass-through). The federal funds rate at 3.50–3.75 per cent sits modestly above the revised Scenario II neutral estimate, consistent with the Cleveland Fed's earlier assessment that policy was in "restrictive territory" with high probability.
Markets are pricing essentially no probability of a rate cut in 2026, and a non-trivial probability of a hike in early 2027. The new Fed Chair inherits a committee that is fundamentally divided over whether the inflation surge represents a transitory supply shock (the Goolsbee view's implication: wait it out, then cut) or a persistent structural realignment (the hawks' view: the neutral rate has risen, and current rates are barely above it). This internal division will complicate forward guidance and may require Warsh to delay any public articulation of his views on r* until there is clearer evidence of inflation's trajectory.
The Euro Area
The ECB held its deposit facility rate at 2.0 per cent through March 2026, describing this level as broadly neutral for the euro area. The Iran War introduced a material complication: European economies, which import a higher share of their energy needs than the US, face a more severe terms-of-trade shock. ING analysis as of May 2026 indicated that the ECB may be compelled to hike once in response to the energy-driven inflation. Germany's fiscal expansion — adding approximately 20 per cent to capital investment in 2026 — continues to provide a structural upward impulse to the euro area neutral, partially offsetting demographic drag.
The euro area neutral, on the revised Bayesian framework, remains approximately 0.3–0.5 percentage points below the US estimate, in the range of 0.9–1.4 per cent real in the base case. The G7 Finance Ministers and Central Bank Governors' communiqué from Paris (18–19 May 2026) focused substantially on global macro imbalances — the persistent pattern of Chinese current account surplus, US current account deficit (3.6 per cent of GDP in 2025), and European under-investment — a framing that reinforces the view that structural forces, not cyclical fluctuations, are reshaping equilibrium capital demand globally.
United Kingdom
The Bank of England, which cut Bank Rate to 3.75 per cent in December 2025, faces a similar dilemma to the ECB: a supply shock that exacerbates inflation while clouding the growth outlook. The UK's structural neutral rate appears somewhat below the US but above the euro area. The 2025 Autumn Budget, which raised taxes to post-war highs, represents a fiscal drag that may partially suppress the UK's neutral relative to Continental Europe. Productivity growth has been "exceptionally weak on average" in recent years by the Bank's own assessment — a condition that Goolsbee's framework would associate with limited supply-side capacity to absorb either the Iran shock or any AI-related demand impulse.
The key uncertainty for the UK is the interaction between the oil shock and the base effect of energy price comparisons in the second half of 2026. If oil prices stabilise near current levels, UK headline inflation should moderate from its 2026 peak, creating room for the Bank to resume cutting. If conflict escalates further, the already-divided MPC faces the most difficult stance calibration problem in its independent history.
Japan
Japan is the G7 outlier, and its situation in May 2026 illustrates both the resilience of Scenario I conditions and the new complexity introduced by supply shocks. The BOJ held its policy rate at 0.75 per cent at its April meeting, in a 6–3 vote. The dissenting three members argued for a rise to 1.0 per cent, citing the Iran War's inflationary risks. The BOJ cut its growth forecast for fiscal year 2026 to 0.5 per cent and sharply revised its core inflation forecast upward to 2.8 per cent — a "very light stagflationary situation," as Oxford Economics put it.
BOJ board member Takata's February 2026 remarks are revealing: he noted that the neutral interest rate was never a topic of market discussion during his four decades in the Japanese bond market, and emphasised that the concept is important from a theoretical perspective but that estimating it with precision for Japan remains genuinely difficult given the structural peculiarities of Japan's deflationary legacy. Japan's experience remains the most compelling real-world illustration of what Scenario I entails at full scale — and a reminder that supply shocks can temporarily push inflation above target in an economy whose neutral rate is structurally very low without implying that neutral has risen.
Canada
Under Prime Minister Mark Carney — who brings to the table the direct experience of having navigated the 2011–2013 Bank of Canada governorship and the 2020–2023 Bank of England tenure — Canada arrives at Évian with a distinctive perspective on neutral rate estimation. The Bank of Canada's long-run neutral estimate has historically tracked the US estimate with a modest lag, consistent with the two economies' close integration. The current Canadian policy rate and fiscal position are both somewhat more constrained than the US, with the Bank of Canada's rate below the Fed funds rate at comparable stages of the cycle.
V. The Goolsbee–Warsh Divide: A Structural Debate for the Évian Agenda
The intellectual division between Goolsbee and the Warsh–Treasury framework is not merely a US monetary policy dispute. It is, at a deeper level, a disagreement about the mechanism through which AI interacts with r*, with implications for every G7 economy.
The Warsh–Treasury (Bessent) position: AI is a supply-side productivity revolution analogous to the 1990s information technology boom. As with the Greenspan era, higher productivity growth is disinflationary because it expands the supply of goods and services faster than demand. In this view, AI allows the economy to grow without inflation — and therefore allows central banks to set policy rates at or below a neutral rate that has not necessarily risen. Rate cuts are appropriate.
The Goolsbee position: The critical variable is not whether AI will eventually be disinflationary — it may well be — but whether that productivity gain is anticipated or realised. If markets and consumers price in future AI wealth today (through higher equity valuations, higher corporate investment, and wealth-effect consumption), the economy faces demand-side overheating before the supply-side benefits arrive. In this scenario, rates need to be higher near-term to offset the demand pull from anticipated — not yet realised — productivity. AI expectations are themselves inflationary, requiring tighter not looser policy in the near term.
Goolsbee made this argument in Tokyo on 27 May 2026, noting that the 1990s parallel cuts both ways: if the current moment resembles 1999 more than 1995, the Fed should be raising rates, not cutting them. The Iran War supply shock, he added, makes this problem worse: the economy faces simultaneously reduced near-term potential output and elevated near-term demand from AI-anticipation effects.
The resolution of this debate will be a defining input to G7 monetary coordination in the second half of 2026 and into 2027. The stakes are high: if Goolsbee is right and the Warsh framework leads to premature easing, the G7 risks a second inflation surge layered on top of the Iran shock. If Warsh is right and Goolsbee's caution leads to excessive tightening, G7 economies could be forced into an unnecessary recession just as AI productivity begins to materialise.
VI. The May 2026 G7 Finance Ministers' Communiqué: Implications for the Neutral Rate
The G7 Finance Ministers and Central Bank Governors' communiqué of 19 May 2026 — the substantive preparatory document for the Évian Leaders Summit — centred on three strategic priorities under the French Presidency: reducing global imbalances, addressing non-market policies and practices, and coordinating on critical raw materials and supply-chain resilience.
The focus on global imbalances is directly relevant to the r* debate, though it was not framed in those terms in the communiqué. The pattern of Chinese under-consumption and current account surplus, US over-consumption and current account deficit (3.6 per cent of GDP), and European under-investment reflects precisely the global savings–investment imbalance that has historically been the most important determinant of global r*. The secular stagnation hypothesis of the 2010s rested on a savings surplus; the question confronting the G7 is whether the US fiscal expansion and AI investment boom are structurally resolving that imbalance — permanently raising global r* — or whether the underlying structural forces (ageing demographics, Chinese savings culture, German export surpluses) reassert themselves once the cyclical impulses fade.
The communiqué's language on "macroeconomic imbalances" and its call on the IMF to enhance surveillance is consistent with a G7 that is genuinely uncertain about the equilibrium — and knows it.
VII. Signals That Would Revise the Posterior
The Bayesian framework is dynamic. The following observable signals, in order of their potential impact on the posterior r* distribution, would cause material revision if they arrive before or during the Évian Summit.
A ceasefire or resolution of the Iran conflict — Would reduce near-term energy inflation pressure, allow the anticipated-productivity-inflation mechanism (Goolsbee's argument) to dominate the supply-shock complication, and clarify whether core inflation is sticky or was primarily energy-driven. If oil returns toward $70–75 per barrel, the case for Scenario II reasserts itself clearly, and rate cuts could resume in early 2027.
AI productivity measurable in aggregate TFP data — The single most important medium-run signal. If US total factor productivity data through H2 2026 shows a sustained elevation above trend — not just in tech-sector firms but across healthcare, logistics, finance, and manufacturing — the probability weight on Scenario III rises sharply. This would validate the Warsh framework and argue for a higher long-run neutral.
US fiscal trajectory — If the reconciliation legislation (OBBBA) produces a deficit path above 7 per cent of GDP, sovereign borrowing pressure intensifies and term premia rise further, supporting Scenario III and incrementally Scenario IV. If a credible medium-term consolidation framework emerges, this reduces Scenario IV tail risk and compresses term premia.
FOMC resolution under Warsh — Whether Warsh builds consensus for a clear forward guidance framework or the committee remains fractured will determine whether markets can price the neutral rate with reasonable confidence or must assign a high uncertainty premium to US duration assets.
VIII. Strategic Policy Implications for the Évian Summit
The following implications flow from the updated analysis and are offered as a framework for the G7's engagement with the neutral rate question.
Acknowledge the structural shift while respecting uncertainty. The balance of evidence supports the view that r* has migrated upward from post-2008 lows across the G7 — but the magnitude of the shift remains genuinely model-dependent. G7 leaders and finance ministers should avoid the twin errors of dismissing the shift (returning to "lower for longer" rhetoric that would encourage misallocation) and overstating it (locking in a high-neutral narrative that could prove premature if AI productivity disappoints or the Iran shock proves deflationary once it resolves).
The Goolsbee framework deserves explicit engagement. Whether or not G7 central banks formally adopt Goolsbee's anticipated-productivity-inflation framework, the underlying distinction between unexpected and expected productivity gains is analytically sound and has implications for fiscal policy. Governments that are structurally increasing capital expenditure — on defence, green transition, and AI infrastructure — on the basis of anticipated AI productivity gains are themselves contributing to the demand-side overheating that Goolsbee describes. If that demand materialises before the AI supply response, G7 fiscal deficits are adding to inflationary pressure at precisely the wrong time.
The Iran War shock is a complication, not a regime change. The oil supply disruption deserves to be treated as a temporary (if persistent) supply shock rather than evidence of a permanently higher r*. Monetary policy should neither tighten dramatically in response to energy price pass-through — which would harm underlying demand unnecessarily — nor use the supply shock as justification for premature easing. The appropriate response is watchful restraint.
Coordinate on the communications challenge. The divergence in r* estimates — below 1 per cent (HLW) to above 3 per cent (market forwards) — is itself a source of financial stability risk. When market participants cannot anchor long-run rate expectations with reasonable precision, they assign risk premia that raise borrowing costs across the board and reduce the efficiency of capital allocation. A G7 commitment to transparency and regular publication of model-based r* estimates, along with honest communication about uncertainty ranges, would reduce this risk premium at a time of genuine structural uncertainty.
Japan's experience remains the cautionary tail. The BOJ's continued difficulty exiting ultra-low rates after three decades confirms that once an economy is locked into a Scenario I equilibrium, exiting is extraordinarily costly. The lesson for other G7 members is asymmetric: the cost of prematurely returning to near-zero rates (if r* has genuinely risen) is much lower than the cost of remaining at near-zero rates if the neutral has shifted durably higher. The asymmetry argues for maintaining rates closer to the Scenario II–III range rather than rushing back to the Scenario I range.
IX. Conclusion: The Star Has Moved, the Telescope Is Still Calibrating
The neutral rate has not vanished. The evidence as of 30 May 2026 is that it has moved — upward from the post-2008 lows — but the location of its new resting place remains genuinely uncertain. The Bayesian posterior for US real r* of approximately 1.45–1.70 per cent represents a considered central estimate, not a confident fact.
Three new elements distinguish the landscape in May 2026 from the analysis of February 2026:
The Iran War has introduced a supply shock that simultaneously masks and amplifies the structural r* question: it raises observed inflation without necessarily raising the equilibrium, but it intensifies the Goolsbee anticipated-productivity-inflation problem.
The Warsh transition has replaced the acute political-pressure risk with an institutional-uncertainty risk: the question is no longer whether the Fed will be forced to set rates by presidential fiat, but whether a deeply divided FOMC under a new chair with strong convictions can build the internal consensus required for effective forward guidance.
Goolsbee's analytical contribution in Tokyo provides the clearest theoretical framework yet for why r* might be elevated in the near term — not because AI has proven its structural productivity case, but because the anticipation of AI has already shifted behaviour. The telescope, as noted in the original analysis, does not create the stars. But when people behave as if the star is in a certain location before it has actually arrived there, the monetary policy implications are no less real.
For G7 leaders assembling at Évian, the conclusion is both intellectually demanding and practically urgent: the era of costless capital has ended, or at least interrupted. The path to a new equilibrium runs through the management of supply shocks, the honest acknowledgement of model uncertainty, the defence of institutional credibility, and the recognition that the productivity dividend from AI — if it comes — will arrive on its own timetable, not the one that financial markets have priced.
Annex: Key Data Points as of 30 May 2026
| Indicator | Value | Source / Date |
| US Federal Funds Rate | 3.50–3.75% | FOMC, May 2026 |
| HLW Real r Estimate (US)* | ~0.84–1.0% | NY Fed, Q4 2025 |
| Richmond Fed Lubik-Matthes r* | >2.2% real | Richmond Fed, March 2026 |
| Cleveland Fed Zaman Nominal Neutral | 3.7% (68% CI: 2.9–4.5%) | Cleveland Fed, 2025 |
| FOMC Median Long-Run Dot | 3.1% nominal | March 2026 SEP |
| ECB Deposit Rate | 2.0% | March 2026 |
| BOJ Policy Rate | 0.75% | April 2026 |
| Bank of England Bank Rate | ~3.75% | As of late 2025 |
| US CPI (April 2026) | 3.8% year-on-year | BLS |
| Brent Crude | ~$96/barrel | Late May 2026 |
| US Current Account Deficit | 3.6% of GDP | 2025 |
| OECD G20 Inflation Forecast | 4.0% | OECD, March 2026 |
Sources used in this report include: Federal Reserve Bank of New York r tracker (Holston-Laubach-Williams and Laubach-Williams models); Federal Reserve Bank of Cleveland Economic Commentary (Horn and Zaman, 2025); Federal Reserve Bank of St. Louis Economic Outlook (Kliesen, May 2026); Federal Reserve Bank of Richmond Lubik-Matthes Natural Rate tracker (updated March 2026); Federal Reserve Bank of Dallas Economic Letter on Iran War inflation (April 2026); Federal Reserve Bank of Chicago statements and speeches of Austan Goolsbee (May–June 2026); Bank of Japan Monetary Policy Statements (April 2026) and Board Member Takata remarks (February 2026); ECB Monetary Policy Decision (March 2026); G7 Finance Ministers' and Central Bank Governors' Communiqué, Paris, 19 May 2026 (Banque de France / EU Council); OECD Economic Outlook revision (March 2026); CNBC and Reuters reporting on Kevin Warsh confirmation (May 2026); Chase and US News analysis of Warsh Fed chair implications (May 2026); ING THINK central bank outlook (May 2026); Dallas Fed Iran War inflation modelling (April 2026); CEPR VoxEU column on Iran War inflation (May 2026). The Bayesian scenario framework and posterior estimates are analytical constructs developed in this report and do not represent the position of any single institution
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