San Francisco Fed Challenges Consensus on Monetary Policy Effectiveness

The Federal Reserve's current policy rate may be more accommodative than previously thought, according to research published by the San Francisco Fed. Vasco Cúrdia, a research advisor at the regional bank, analyzed medium-term estimates of the 'neutral rate', the level that neither accelerates nor slows the economy, and found that the current 3.50%-3.75% policy rate target range falls below this threshold.

Unlike long-term neutral rate estimates, which are relatively stable and often cited by Fed officials, medium-term estimates more strongly reflect business cycle conditions and transitory factors. Cúrdia noted that using medium-term estimates may produce outcomes that are more optimal for the economy compared to relying on long-term estimates.

The analysis suggests that policy based on this measure may be more effective at stabilizing inflation and achieving maximum employment. However, it's essential to acknowledge the high degree of uncertainty surrounding these estimates.