The r-star debate has well and truly gone mainstream.

Ahead of Jackson Hole, Wall Street Journal “Fed whisperer” Nick Timiraos penned a not-so-subtle piece on the subject. It’s called “Why the Era of Historically Low Interest Rates Could Be Over.” You could read it. Or you could just read the deck: “Higher productivity and increased deficits could raise the ‘neutral’ rate of interest.”

There you go. As noted here on Sunday, the neutral rate debate will feature prominently at Jackson Hole. The theme for this year’s conference is “Structural Shifts in the Global Economy.” Those structural shifts define the contours of what I’ve called the “changed world” debate, which is the backdrop for the neutral rate discussion.

For the better part of a year, I’ve described a prospective shift up in the Fed’s long run dot as a key risk for equities, as it’d effectively mark an official acknowledgement that the world has probably changed.

A glass half-full take says a higher r-star reflects better growth prospects and could therefore be construed as a bullish development, particularly if there’s a domestic productivity boom that recaptures some of the structural disinflation lost to the pandemic, the war and, looking ahead, efforts to isolate China.

Markets may adopt a glass half-empty take initially, though. If “higher for longer” is a drag, then “higher in perpetuity” is even more foreboding, and given the concentration of equity leadership in duration proxies, bear steepening is an adverse development. (A disorderly bear-steepener is a total non-starter.)

“The macro catalyst for equities drama remains in the rates space, with Jackson Hole at end-of-week, and the market searching for more discussion on the neutral rate,” Nomura’s Charlie McElligott said Monday, flagging the same Timiraos piece on the way to asking (rhetorically), “How does the Fed acknowledge this structural shift higher in r-star?”

One answer is just a higher long run dot. Another avenue is the HLW model, shown below. Purportedly, r-star is lower now, or anyway not materially different from pre-pandemic estimates. Purportedly.

I’d be remiss not to note that communicating a higher r-star through the model would be a bit awkward. It was just three months ago when John Williams relaunched the estimates following a COVID-related hiatus. “Based on the new r-star estimates… we see no signs of a significant reversal of the decline evident in prior decades,” he declared. “There is no evidence that the era of very low natural rates of interest has ended.”

That was pretty unequivocal, but consensus is shifting away from the notion that r-star hasn’t changed. And long-end rates are arguably reflecting that shift in August’s reals-led bond rout. At the same time, expectations for Fed cuts in 2024 have been trimmed by 30bps this month alone.

“Equities bears need rate vol to stage a comeback with a continued bear-steepening push into this likely higher neutral rate acknowledgement,” McElligott went on, noting that the biggest negative macro factor attribution for US stocks this month has been rate vol. “If Jackson Hole were to disappoint with regard to acting as a further bear-steepening catalyst — and if NVDA continues the revenue fireworks midweek — the window for an equities pullback [may] be shut again,” he added.