One neutral rate estimate suggests Fed's policy stance is accommodative, paper says
TLT•San Francisco Fed research says policy may be accommodative
Aug 17 (Reuters) - The Federal Reserve's current policy rate is probably accommodative, if measured against a medium-run estimate of the so-called neutral rate at which borrowing costs are neither slowing nor boosting 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 that policy is currently restrictive or possibly neutral. It similarly clashes with the picture derived from Fed policymaker estimates of the long-run neutral rate that indicate the current benchmark interest rate range of 3.50%-3.75% is perhaps half a percentage point above a neutral setting.
Using a longer-run neutral-rate estimate, however, may deliver less optimal economic outcomes than rules relying on a medium-term estimate, the new research suggested.
Paper says medium-run estimate points below the current policy rate
"Analysis suggests that monetary policy using this measure could stabilize inflation and achieve maximum employment more effectively than standard benchmarks," Vasco Curdia, a research advisor at the San Francisco Fed, wrote in the latest Economic Letter published by the regional Fed bank. "As of August 2026, estimates of the medium-run real natural rate suggest that monetary policy is accommodative, although it's important to keep in mind that the uncertainty around this estimate remains high."
Using the medium-term neutral-rate metric proposed in the paper shows the current policy rate target is half to three-quarters of a percentage point below a level that would allow the economy to operate at full capacity without slowing it down.
Fed policymakers often use neutral rate estimates to help assess whether policy is tight or loose and decide if they should raise or lower interest rates.
Widely used monetary policy rules typically incorporate a longer-run neutral rate estimate, which tends to be relatively stable. Policymakers sometimes also refer to short-run neutral rate estimates when discussing whether rates are appropriately set, though these tend to be very volatile.
