TechFlow News, according to Jinshi Data, Nick Timiraos, known as the "Fed whisperer," has published a new article stating that amid debates over whether and when the Federal Reserve will cut interest rates, another critical debate is unfolding: where are interest rates headed in the long run? The crux of the matter lies in the neutral rate—the interest rate that balances supply and demand for savings while maintaining stable economic growth and inflation. The neutral rate, sometimes referred to as "r*" or "r-star," cannot be directly observed but must be inferred. Every quarter, Fed officials project the long-term interest rate, which is essentially their estimate of the neutral rate. Now, some believe there are grounds for the neutral rate to rise, potentially reshaping broad asset prices—thanks to strong economic performance and persistently high inflation.
However, the current debate over the neutral rate may have little short-term impact on the Fed, as today's interest rates already exceed nearly all estimates of the neutral rate. This implies that current rates are restraining both economic growth and price increases, and nominal rates in the future are more likely to decline than rise. If the U.S. economy remains strong while inflation stays stubbornly high, markets may increasingly speculate that the neutral rate has risen, suggesting that current rates aren't as restrictive as they seem. From this perspective, the Fed would have even less reason to cut rates.
In an alternative scenario, if inflation resumes its downward trend, discussions about the neutral rate will shift focus toward how much the Fed might lower rates in subsequent moves. Nick said unequivocally that the Fed desires "policy normalization," but the question remains: where is "normal"? They won’t stay at 5%, nor will they drop all the way back to 2.5%. They (probably) feel more comfortable settling somewhere in the 3% to 4% range—but nothing is settled yet. Interest rate futures indicate that the federal funds rate is expected to stabilize around 4% over the coming years.
