#How Many Rate Cuts Are Necessary for Neutral Monetary Policy?
There is ongoing uncertainty about the number of rate cuts required to attain a neutral monetary policy stance. Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, has indicated that the Federal Reserve may need to reconsider its estimates regarding the neutral rate.
Currently, estimates suggest that the neutral interest rate might hover around 3.1%. This figure is notably higher than the pre-pandemic range of 2 to 3%. The elevated neutral rate indicates that fewer rate cuts could be beneficial to reach a point where monetary policy neither stimulates nor inhibits economic growth.
This uncertainty surrounding the neutral rate brings to mind discussions from the previous decade, where interest rates remained low for extended periods, aimed at supporting economic recovery. This approach starkly contrasts with the Fed’s swift action to reduce rates to near-zero during the COVID-19 pandemic in 2020. The current landscape encourages investors to remain attentive to further developments in interest rate policies and their potential impacts on the economy.