Fed's Kashkari Questions Future Rate Cut Trajectory

Fed's Rate Cut Path Clouded by Neutral Rate Uncertainty

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, voiced uncertainty today regarding the appropriate number of future rate cuts required to achieve a neutral monetary policy. His remarks highlight ongoing debate within the Fed about the so-called 'neutral rate' of interest.

Key Takeaways

• Federal Reserve’s Neel Kashkari highlighted uncertainty about the number of rate cuts needed to reach a neutral policy rate.
• Rate cuts in 2025 coincide with a Fed shift toward an easing cycle, but the ‘neutral rate’ is higher than pre-pandemic levels.

The 'neutral rate' is the theoretical interest rate at which monetary policy is neither stimulating nor restraining economic growth. Kashkari, along with other Fed officials, now estimates this rate to be around 3.1%. This is notably higher than pre-pandemic estimates, which ranged from 2-3%.

The implications of a higher neutral rate are significant. If the neutral rate is indeed higher, fewer rate cuts may be necessary to reach a truly neutral policy stance. This contrasts with the Fed’s aggressive cuts to near-zero during the COVID-19 era in 2020.

This debate echoes discussions from the 2010s, a period characterized by prolonged low interest rates intended to aid economic recovery. Understanding the true neutral rate is crucial for guiding future monetary policy decisions and avoiding potential economic imbalances.