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COLUMN-The Fed’s new neutrality may be one of the FOMC’s lessons: Mike Dolan

Written by Mike Dolan

London, March 15 (Reuters)Next week’s Federal Reserve meeting lost some of the enthusiasm it once had as the central bank’s likely first interest rate cut, but it’s a sign of how the Fed thinks the economy is doing over the long term. It has the potential to shed great light on crabs.

Futures markets are now pricing in the chance of a first rate cut at the March 20th meeting as near-zero, given the verbal pushback from Fed officials throughout the year, still-sticky inflation and a punchy growth outlook. and are now preferring June or July instead.

Still, readings from the meeting included information about what might happen next, including quarterly “dot plot” updates on policymakers’ outlooks and the potential start of discussions on curbing Fed balance sheet outflows. will be filled with.

As many investors reassess the long-term trajectory of the U.S. economy and whether it is on a sustainable accelerated growth trajectory, a supposed “neutral” policy that can neither stimulate nor restrain the economy A big focus will be on what the Fed’s points imply about interest rates. semester.

Fed policymakers have essentially kept their long-term policy rate assumption at 2.5% since before the pandemic, based on median forecasts, but it was briefly lowered to 2.4% in early 2022, but soon It’s different that it was reversed.

And since Fed officials assume that inflation will somehow return to its 2% target over time, the “real” neutral interest rate is lower than the current real policy rate of about 2.5%. This means that it is estimated to be only 0.5%.

The Fed could cut interest rates by 200 basis points (bps) over the next two years and still argue that policy rates are still in “restrictive” mode, so raising this assumption means the Fed will start cutting rates. It may not affect whether or even when rates are cut. Economic activity and inflation are low.

But it has potential significance in how far the Fed believes any easing cycle, or “terminal rate” in central bank parlance, is likely. That may be why many investors are paying attention.

Discussions are clearly progressing well.

Because the theoretical neutral interest rate cannot be observed in real time, it is an ephemeral beast that is almost impossible to pinpoint until it is actually reached, and even if it is reached, it will remain mysterious due to shifting economic sands. It may be wrapped.

Most Fed officials, including Chairman Jerome Powell, claim they don’t know exactly where it is.

But their best guess about it is what they think is going on under the hood of the economy and how restrictive the current policy rate of 5.25% to 5.50% is at the moment. It should become clear what they think, and where interest rates will settle once they begin their easing campaign.

Fed tweets

Although he is not a voting member of this year’s Federal Reserve Open Market Committee (FOMC) board, the Minneapolis Fed President Neel Kashkari Discussions resumed early last month.

“At least during the post-pandemic recovery period, there may have been an increased policy stance that indicates neutrality,” he said.

San Francisco Fed President Mary Daley, this year’s FOMC elector, has since indicated that her expectation for the neutral rate is between 0.5% and 1.0%, and that the long-term policy rate is between 2.5% and 3.0%. He said there was.

Richmond Fed President Thomas Barkin, also a 2024 voter, said it was certainly possible that the neutral rate would rise. Cleveland Fed President Loretta Mester also said this month that this is an open question.

The New York Fed spoke in London last week, John Williams Apparently keen to dampen the idea of ​​a major change in mindset, he said the neutral rate had not risen much since the pandemic.

Such public uncertainty will likely raise the bar for changes in the median “point” of long-term interest rates.

But even a small rise could affect how markets think about everything from the dollar to Treasury debt to the stock market.

Futures markets are already predicting that the Fed’s policy interest rate will settle in a range of 3.0 to 3.5% over the next two years, which is nearly 200 basis points lower, but still below the Fed’s current long-term policy rate of 2.5%. far exceeds that of

If the maximum 50bps “point” returns to 3% (as it was until 2018), the market’s assumed “end rate” for easing could also be raised.

What it shows is that the Fed has been able to reduce the US’s remarkable disinflation over the past year, even though the sharply rising interest rates have left the labor market virtually intact and so far not sowing the seeds of a recession. This means that they are at least considering the implications.

As a result, many economists are also going back to square one.

One of the key deciding factors this year is the US revision. immigration statistics This could change assumptions about the long-term trajectory of the labor force and increase the level of job creation that can occur in the future without further increasing wage growth or inflation.

Other analyzes focus on how rising public debt levels play a role in raising the neutral interest rate.

work Paper published Last week, the Bank for International Settlements attempted to quantify the impact of massive fiscal expansion on the “natural rate of interest.”

The study, by economists Rodolfo Campos, Jesús Fernández-Villaverde, Gallo Nuno, and Peter Paz, found that a 10 percentage point increase in the public debt-to-GDP ratio would increase the natural rate of interest by 20. We estimate that the price will rise by 50 bps.

Given that U.S. debt/GDP has risen about 20 percentage points since before the pandemic, is now close to 100%, and is projected by the Congressional Budget Office to rise even further to 116% over the next decade. This assumption will definitely provide food for thought for the Fed.

The opinions expressed here are those of the author, a Reuters columnist.

Fed Dot Plotline https://tmsnrt.rs/4ad1COt

Fed expected to keep interest rates on hold as inflation stalls https://reut.rs/490dphT

Terminal rate congestion? March 2026 interest rate futures recover https://tmsnrt.rs/3PlTYsY

CBO chart for the US workforce https://tmsnrt.rs/4ceJsOg

CBO Chart on US Debt/GDP Forecast https://tmsnrt.rs/48VzJJL

(Edited by Jamie Freed)

((mike.dolan@thomsonreuters.com; +44 207 542 8488; Reuters Message: mike.dolan.reuters.com@thomsonreuters.net @))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Summarize this content to 100 words
Written by Mike Dolan
London, March 15 (Reuters) – Next week’s Federal Reserve meeting lost some of the enthusiasm it once had as the central bank’s likely first interest rate cut, but it’s a sign of how the Fed thinks the economy is doing over the long term. It has the potential to shed great light on crabs.
Futures markets are now pricing in the chance of a first rate cut at the March 20th meeting as near-zero, given the verbal pushback from Fed officials throughout the year, still-sticky inflation and a punchy growth outlook. and are now preferring June or July instead.

Still, readings from the meeting included information about what might happen next, including quarterly “dot plot” updates on policymakers’ outlooks and the potential start of discussions on curbing Fed balance sheet outflows. will be filled with.
As many investors reassess the long-term trajectory of the U.S. economy and whether it is on a sustainable accelerated growth trajectory, a supposed “neutral” policy that can neither stimulate nor restrain the economy A big focus will be on what the Fed’s points imply about interest rates. semester.
Fed policymakers have essentially kept their long-term policy rate assumption at 2.5% since before the pandemic, based on median forecasts, but it was briefly lowered to 2.4% in early 2022, but soon It’s different that it was reversed.
And since Fed officials assume that inflation will somehow return to its 2% target over time, the “real” neutral interest rate is lower than the current real policy rate of about 2.5%. This means that it is estimated to be only 0.5%.
The Fed could cut interest rates by 200 basis points (bps) over the next two years and still argue that policy rates are still in “restrictive” mode, so raising this assumption means the Fed will start cutting rates. It may not affect whether or even when rates are cut. Economic activity and inflation are low.

But it has potential significance in how far the Fed believes any easing cycle, or “terminal rate” in central bank parlance, is likely. That may be why many investors are paying attention.
Discussions are clearly progressing well.
Because the theoretical neutral interest rate cannot be observed in real time, it is an ephemeral beast that is almost impossible to pinpoint until it is actually reached, and even if it is reached, it will remain mysterious due to shifting economic sands. It may be wrapped.
Most Fed officials, including Chairman Jerome Powell, claim they don’t know exactly where it is.
But their best guess about it is what they think is going on under the hood of the economy and how restrictive the current policy rate of 5.25% to 5.50% is at the moment. It should become clear what they think, and where interest rates will settle once they begin their easing campaign.

Fed tweets
Although he is not a voting member of this year’s Federal Reserve Open Market Committee (FOMC) board, the Minneapolis Fed President Neel Kashkari Discussions resumed early last month.

“At least during the post-pandemic recovery period, there may have been an increased policy stance that indicates neutrality,” he said.
San Francisco Fed President Mary Daley, this year’s FOMC elector, has since indicated that her expectation for the neutral rate is between 0.5% and 1.0%, and that the long-term policy rate is between 2.5% and 3.0%. He said there was.
Richmond Fed President Thomas Barkin, also a 2024 voter, said it was certainly possible that the neutral rate would rise. Cleveland Fed President Loretta Mester also said this month that this is an open question.
The New York Fed spoke in London last week, John Williams Apparently keen to dampen the idea of ​​a major change in mindset, he said the neutral rate had not risen much since the pandemic.
Such public uncertainty will likely raise the bar for changes in the median “point” of long-term interest rates.

But even a small rise could affect how markets think about everything from the dollar to Treasury debt to the stock market.
Futures markets are already predicting that the Fed’s policy interest rate will settle in a range of 3.0 to 3.5% over the next two years, which is nearly 200 basis points lower, but still below the Fed’s current long-term policy rate of 2.5%. far exceeds that of
If the maximum 50bps “point” returns to 3% (as it was until 2018), the market’s assumed “end rate” for easing could also be raised.
What it shows is that the Fed has been able to reduce the US’s remarkable disinflation over the past year, even though the sharply rising interest rates have left the labor market virtually intact and so far not sowing the seeds of a recession. This means that they are at least considering the implications.
As a result, many economists are also going back to square one.

One of the key deciding factors this year is the US revision. immigration statistics This could change assumptions about the long-term trajectory of the labor force and increase the level of job creation that can occur in the future without further increasing wage growth or inflation.
Other analyzes focus on how rising public debt levels play a role in raising the neutral interest rate.
work Paper published Last week, the Bank for International Settlements attempted to quantify the impact of massive fiscal expansion on the “natural rate of interest.”
The study, by economists Rodolfo Campos, Jesús Fernández-Villaverde, Gallo Nuno, and Peter Paz, found that a 10 percentage point increase in the public debt-to-GDP ratio would increase the natural rate of interest by 20. We estimate that the price will rise by 50 bps.
Given that U.S. debt/GDP has risen about 20 percentage points since before the pandemic, is now close to 100%, and is projected by the Congressional Budget Office to rise even further to 116% over the next decade. This assumption will definitely provide food for thought for the Fed.

The opinions expressed here are those of the author, a Reuters columnist.
Fed Dot Plotline https://tmsnrt.rs/4ad1COt
Fed expected to keep interest rates on hold as inflation stalls https://reut.rs/490dphT
Terminal rate congestion? March 2026 interest rate futures recover https://tmsnrt.rs/3PlTYsY
CBO chart for the US workforce https://tmsnrt.rs/4ceJsOg
CBO Chart on US Debt/GDP Forecast https://tmsnrt.rs/48VzJJL
(Edited by Jamie Freed)
((mike.dolan@thomsonreuters.com; +44 207 542 8488; Reuters Message: mike.dolan.reuters.com@thomsonreuters.net @))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

https://www.nasdaq.com/articles/column-feds-new-neutral-may-be-one-fomc-takeaway:-mike-dolan COLUMN-The Fed’s new neutrality may be one of the FOMC’s lessons: Mike Dolan

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