Fed Debate on Neutral Rate Misses the Bigger Picture
It’s better to let economic conditions dictate when to pause the monetary tightening process.
Central bankers need to refocus on the economy.
Photographer: Brendan Smialowski/AFP
Federal Reserve policy makers are debating whether to stop tightening monetary policy when interest rates reach a neutral level that neither stimulates nor restricts growth. At this point, there is no easy answer, but central bankers should de-emphasize the level of rates at which they would pause and instead focus on the economic conditions that justify a pause.
The federal funds rate currently sits in a range of 1.75 percent to 2.0 percent. The median policy maker estimate of the neutral rate is 2.9 percent within a wide overall range of 2.25 percent to 3.5 percent. The lowest of the estimates will almost be reached with the next rate increase, widely expected to come Sept. 21.