Fed's Current Interest-Rate Stance May Be More Accommodative Than Thought

A recent study by the Federal Reserve Bank of San Francisco suggests that the current interest-rate stance may be more accommodative than policymakers believe when assessed against a medium-term estimate of the economy's neutral interest rate. According to Reuters, this finding contrasts with the view of many U.S. central bank policymakers who have generally assessed monetary policy as restrictive or close to neutral.

The study argues that relying on a medium-term estimate of the neutral rate could provide a better guide for monetary policy than using longer-run measures alone. The research suggests that the current federal funds target range is around 0.5 to 0.75 percentage point below the level indicated by the medium-term neutral-rate measure.

This would imply that monetary policy is providing some support to economic activity rather than restraining it, according to Vasco Curdia, a research adviser at the San Francisco Fed. The study emphasizes that uncertainty surrounding the estimate remains significant and notes that estimates of the longer-run neutral rate suggest that the Fed's current benchmark interest-rate range of 3.50%-3.75% remains roughly half a percentage point above a neutral level.

The implications for monetary policy are significant, as neutral-rate estimates help determine whether borrowing costs are sufficiently high to cool inflation or sufficiently low to support economic growth and employment. The San Francisco Fed research suggests that a medium-term measure could strike a better balance between the stability of longer-run estimates and the volatility of short-run measures.