The Fed and Rates: The New Neutral?

Written by: Global Thought Leadership | September 21, 2018

Source: Bloomberg, September 20, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


  • The Fed’s Open Market Committee (FOMC) meets this week as signs of robust economic growth continue to surface.
  • Most observers expect the FOMC to raise its target rate by 25 basis points to 2.25%, in line with its increasingly clear signals, delivered in speeches by Chairman Powell and other Fed members over the past few months.
  • But the Fed’s quarterly economic outlook will be scrutinized for signs of its reaction to key developments over the quarter, including the continuing escalation of trade tensions between the U.S. and its key trading partners in Canada, Japan and China.
  • The highest-profile sign will likely be the Fed’s quantitative projections of growth and inflation – the so-called “dot plot”.
  • But perhaps more important will be how it describes its decisions. Will it state that the expected hike brings an end to its post-recession “accommodative stance”, or does it believe that it will take additional moves to bring its policies into “neutral” territory?
  • A “neutral” stance is widely understood to neither stimulate economic growth beyond its “natural” rate, nor slow the economy by raising interest rates and otherwise restricting the supply of monetary assets needed to support that “natural” rate.
  • Of course, there’s very little agreement, even among skilled economists,[1] about what that natural rate might be at this stage of the economy – or at any other stage, for that matter. But some observers use the oversimplified rule of thumb that any Fed Funds target rate above the core inflation rate is no longer neutral.
  • Though the Fed’s target rate will likely be above the level of former Fed Chair Janet Yellen’s favorite measure – core Personal Consumption Expenditure (PCE) inflation, other factors could continue to be accommodative – including the pace of the Fed’s net sell-down of its balance sheet.
  • The bottom line: despite the apparent certainty of the outcome of the FOMC meeting this week, there’s plenty of information to be gleaned from the meeting and its aftermath.

All data Source: Bloomberg, September 20, 2018, unless otherwise specified.


1 See, for example, Laubach, Thomas, John C. Williams. 2015. “Measuring the Natural Rate of Interest Redux.” Federal Reserve Bank of San Francisco Working Paper 2015-16.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Personal Consumption Expenditures (PCE) Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.

The Federal Funds rate (Fed Funds rate, Fed Funds target rate or intended Federal Funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.




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