It Would Be a Whole New Economy If the Fed Pauses at ‘Neutral’
Less aggressive interest rates could make the dollar more competitive and the labor market stronger.
The U.S. is accustomed to “Drive.” But the Fed could shift its approach.
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The biggest debates in Federal Reserve circles right now is where the level of “neutral rates” is, and whether officials should stop increasing interest rates once they get there. Halting interest rate increases at the Fed’s estimate of neutral would represent a change from how the Fed has conducted policies in the last two cycles, and would shift economic risks from workers to companies.
For most of the time since the inflationary crisis of the late 1970s, Treasury rates have generally been a fair amount higher than the level of inflation, meaning that real interest rates — the return bondholders would earn in excess of inflation — have been strongly positive. This has particularly been the case toward the end of economic cycles when the unemployment rate was low and financial excesses have been apparent: the stock market in the late 1990s, and the housing and credit markets in the mid-2000s.