Fed Thoughts: The Natural or Neutral Rate of Interest, or R* in Brief

As we look ahead, we examine the relationship between r* and the real policy rate.

Abstracting from the effects of the business cycle, our working hypothesis is that r* is around 1½ percent. If so, monetary policy is currently restrictive, but not as much as the Fed thinks.

Chief Economist and Macro Strategist Vincent Reinhart discusses the neutral rate in the early 2000s and why we think that the nominal policy rate should settle in a range higher than currently expected.