Fed spokesperson: Speculation of rising neutral interest rate may delay Fed rate cuts

NickTimiraos wrote in his latest article that in the debate over whether and when the Fed will cut interest rates, another important debate is unfolding: where will interest rates go in the long run? The key to the problem lies in the neutral interest rate: the interest rate that can balance the supply and demand of savings while ensuring stable economic growth and inflation. The neutral interest rate is sometimes called "r*" or "r-star" and cannot be directly observed, but can only be inferred. Every quarter, Fed officials predict long-term interest rates, which is actually their estimate of the neutral interest rate. Now some people think that the neutral interest rate has reason to rise and may change a wide range of asset prices. Because the economy is strong and inflation is "lackluster." But the current debate about the neutral interest rate may have little short-term impact on the Fed because the current interest rate is higher than almost all estimates of the neutral interest rate. This means that current interest rates suppress economic growth and price increases, and nominal interest rates are more likely to fall than rise in the future. If the US economy continues to remain strong and inflation is stubborn, it may trigger market speculation that the neutral interest rate will rise, so that the current interest rate is not so tight. From this perspective, the Fed has even less reason to cut interest rates. Alternatively, if inflation resumes its downward trend, the discussion about the neutral interest rate will focus on the extent of the Fed's subsequent rate cuts. Nick said that there is no doubt that the Fed wants to "normalize policy", but where is the "normalization"? They will not stay at the 5% level, but they will not go all the way down to 2.5%. They (may) feel more comfortable stopping in the 3% or 4% range, but there is no conclusion yet. Interest rate futures show that the Fed funds rate will stabilize at around 4% in the next few years. (Jinshi)