The so-called "neutral" stance for U.S. interest rates is likely to be closer to where the Federal Reserve has currently set borrowing costs, rather than where the central bank expects it to be in the coming years, according to analysts at Yardeni Research.
In a note, the strategists argued that the neutral level -- a theoretical mark which neither helps nor hinders economic activity -- is hovering around 4%, roughly in line with where the Fed has placed rates.
Fed officials, on the other hand, have estimated that neutral rate is 3% and have laid out projections to dip down to this level in 2028.
"In other words, our Paradise Lost has been found at the current level of interest rates," the Yardeni analysts said.
The Fed lowered its benchmark federal funds rate by 25 basis points to a target range of 4.00% to 4.25% earlier this month, delivering its first rate reduction since December.
Updated projections released after the meeting showed a majority of policymakers expect two more cuts in 2025, underscoring the Fed's shift towards supporting a cooling labor market while still keeping an eye on persistent inflation.
Fed Chair Jerome Powell, speaking at his post-decision press conference, described the move as a "risk-management" step, saying officials wanted to guard against the possibility of a sharper rise in unemployment.
The decision was not unanimous. Newly appointed Governor Stephen Miran cast the lone dissent, arguing for a deeper 50 basis point cut.
His so-called "dot" on the Fed's rate outlook was the most aggressive, projecting rates as low as 2.875% by the end of 2025, well beneath the consensus of his colleagues.
The dissent highlighted growing debate inside the Fed over how forcefully to respond to shifting economic conditions.
"In his presser, Powell stated that Fed policy remains tight notwithstanding the latest rate cut," the Yardeni analysts said, referring to a monetary policy stance that aims to restrict economic activity and reduce inflation.
The Fed's projections showed that most policymakers expect the economy to expand by 1.6% this year, above June's forecast. The year-end jobless rate is seen at 4.5% and underlying inflation at 3.1%. Price gains are now not anticipated to slow to the Fed's 2% target until 2028.
Source: Fxstreet
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