New San Francisco Fed research finds the Federal Reserve's current policy rate is probably accommodative when measured against a medium-run neutral-rate estimate. That reading clashes with most policymakers' view that policy is restrictive or neutral, and with their own long-run neutral-rate estimates.
Medium-run estimate diverges from the Fed's own view
The Federal Reserve's current policy rate is probably accommodative, if measured against a medium-run estimate of the neutral rate — the level at which borrowing costs neither slow nor boost the economy — according to research published on Monday by the San Francisco Fed. That conclusion contrasts with the current assessment of most U.S. central bank policymakers, who feel policy is currently restrictive or possibly neutral.
It also clashes with the picture derived from Fed policymaker estimates of the long-run neutral rate, which put the current benchmark interest rate range of 3.50%-3.75% about half a percentage point above a neutral setting.
Curdia's paper points to a lower neutral rate
Using the medium-term neutral-rate metric proposed in the paper, however, the current policy rate target sits half to three-quarters of a percentage point below a level that would let the economy operate at full capacity without slowing it down. Vasco Curdia, a research advisor at the San Francisco Fed, wrote in the latest Economic Letter that this measure suggests monetary policy is accommodative, though he cautioned that uncertainty around the estimate remains high.
According to Reuters, Curdia wrote in the Economic Letter that "monetary policy using this measure could stabilize inflation and achieve maximum employment more effectively".
Why the neutral rate estimate matters
Fed policymakers often use neutral-rate estimates to help assess whether policy is tight or loose and decide whether to raise or lower rates. Widely used monetary policy rules typically rely on a longer-run neutral-rate estimate, which tends to stay relatively stable. Policymakers sometimes also cite short-run neutral-rate estimates when debating whether rates are appropriately set, though those tend to be far more volatile.
Source: Economy News
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