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interest rate adjustment Source: Shutterstock.

New research from the Federal Reserve’s own economists reveal that estimates of the neutral real rate of interest are well below those of policy makers. The low estimates have important implications for policy makers and market participants, suggesting the Fed may still have some hawkish expectations of what can be accomplished in the future despite its dovish turn this year.

The real neutral rate of interest is the rate that is consistent with a balanced economy in the long run. Policy makers use it as a gauge by which to judge the stance of monetary policy. For example, if policy rates are below the neutral rate, the Fed is being accommodative.

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