What is R* and why does it matter to bond traders?

investmentnews.com:

An abstract interest-rate metric is dominating discussions across trading desks ahead of the Jackson Hole symposium, with investors wondering if Federal Reserve Chair Jerome Powell will weigh in, and bracing for further declines in US Treasuries if he does.  

Fidelity International, Jupiter Asset Management and hedge fund Blue Edge Advisors are among those pondering the implications of whether there has been an increase in the neutral rate, also known as R*. 

That’s the theoretical level at which rates neither stimulate nor restrict an economy. If the Fed wants to contain a price surge – as it does now – it raises its benchmark above that level. While economists define R* in inflation-adjusted terms, it’s sometimes also a short-hand reference to the central bank’s nominal policy setting.

So any hint at an upward revision would likely ripple across global markets, forcing a reevaluation on where fair value for Treasury yields is likely to land. An added complication: The level of rates that are best for an economy may not be the best for markets, risking disruptions in the financial system.

“For most traders, R* is like the appendix – assumed to be irrelevant to daily life until it suddenly bursts and makes you painfully care about it,” said Calvin Yeoh, who helps manage the Merlion Fund at Blue Edge.

Fed policymakers have since 2019 had a 2.5% median estimate for the policy rate over the long run — essentially their gauge of neutral — down from 3.5% eight years ago. Boosting it could intensify discussions about whether trend inflation rates are now higher, and whether investors ought to demand bigger premiums to buy longer-term Treasuries, according to Yeoh.

Those questions are already part of the zeitgeist of a market