Hammack's Hawkish Shift: Neutral Rate Estimate Could Reboot Federal Reserve Policy

Cleveland Fed President Beth Hammack thinks the neutral interest rate, also known as r-star or r*, is higher than her Federal Reserve colleagues. According to Hammack, the neutral rate sits between 1.4% and 1.5% in real terms, which puts her at the upper end of the Federal Open Market Committee's range.

Hammack dissented at the July 2026 FOMC meeting, voting in favor of an immediate rate hike to address inflation that remains stubbornly above the Fed's 2% target. By August 2026, Hammack went further, stating that current rates are not 'meaningfully restricting' economic activity.

If Hammack is correct, what looks like restrictive policy might actually be neutral or even accommodative. This could mean the Federal Reserve isn't fighting inflation as hard as it thinks it is, and may need to take more aggressive action to steer inflation back toward target.