Is the Fed's Policy Actually Already "Leaning Dovish"? San Francisco Fed's New Neutral Rate Model Provides Theoretical Ammunition for the Hawks

According to news from Zhitong Finance APP, a study released by the San Francisco Fed on Monday shows that if the so-called medium-term estimate of the neutral rate is used as the benchmark—that is, the interest rate at which borrowing costs neither restrain nor stimulate the economy—then the current Fed policy rate is likely in an accommodative stance. This latest monetary policy study from the San Francisco Fed essentially challenges the mainstream view among economists and Fed officials that the current 3.50%—3.75% benchmark policy rate remains broadly restrictive.

This conclusion contrasts with the views of most US central bank policymakers, who believe the current monetary policy is still restrictive or may already be near neutral. It also conflicts with the picture drawn by Fed policymakers’ estimates for the long-term neutral rate; according to these estimates, the current 3.50%—3.75% benchmark range may be about 0.5 percentage points above the neutral level.

Is Fed policy actually already "accommodative"? New research from the San Francisco Fed rewrites the neutral rate view, adding a key variable to the rate hike debate

However, this new study points out that compared with policy rules based on medium-term neutral rate estimates, using long-term neutral rate estimates may yield less optimal economic outcomes.

San Francisco Fed research advisor Vasco Curdia wrote in the latest edition of the regional Fed's Economic Letter: "The analysis suggests that adopting this indicator for monetary policy, relative to standard benchmarks, may more effectively stabilize inflation and maximize employment. As of August 2026, the system estimating the medium-term real natural rate suggests that monetary policy is accommodative, though it is important to keep in mind that this estimate remains highly uncertain."

According to the medium-term neutral rate metric proposed in the paper, the current policy rate target is 0.5 to 0.75 percentage points below a rate that would allow the economy to operate at full capacity without slowing growth.

Fed policymakers often use neutral rate estimates to help judge whether monetary policy is tight or loose, and thus whether rate hikes or cuts are warranted.

Widely used monetary policy rules usually incorporate the long-term neutral rate estimate, which is relatively stable. Policymakers also occasionally refer to short-term neutral rate estimates when discussing the appropriateness of current rate levels, but the latter are typically very volatile.

The medium-term natural rate estimate Vasco Cúrdia introduced for the San Francisco Fed is roughly 1.5% in real terms, while subtracting about 3% inflation from the current nominal policy rate yields a real policy rate of just 0.5%—0.75%. Thus, according to this model, the Fed’s policy has actually become somewhat accommodative. This is in clear contrast to the "restrictive or near-neutral" view most FOMC officials hold based on the long-run neutral rate, though the author of the paper also stresses a high degree of uncertainty in the estimate range.

Goldman Sachs’ firm bet: no move for the whole year! Markets retreat from "consecutive rate hikes" to "at most one more"

Judging from this regional Fed research paper alone, it is clearly a hawkish analysis—if policy is already below neutral, then in theory there is reason to hike further in order to bring real rates back to neutral. However, it is a research framework, not an official hike signal from the San Francisco Fed or the FOMC.

More definite changes are occurring in consensus market rate expectations: retail sales, employment, and CPI/PPI are forming a chain of evidence increasingly unfavorable to hawkish rate hikes. July CPI rose just 0.1% month-over-month and core CPI rose 0.2%, while year-on-year core inflation has fallen to 2.5%; PPI subsequently was flat month-over-month, well below the +0.2% market expectation, and fell from 5.5% to 4.7% year-over-year; coupled with July nonfarm payrolls unexpectedly dropping 23,000, the argument that the Fed “must immediately re-tighten” is significantly weakened.

Therefore, what is truly interesting is that the market is now choosing to "trust economic data more than this model." After sequential slowdowns in July employment, CPI/PPI, and retail sales, rate futures pricing as of August 18 indicates the probability of a September rate hike has dropped to about 35%, down from 52.2% a week prior; in other words, the market currently sees about a 65% chance the Fed holds steady in September.

Federal funds futures are pricing in just about a 21 basis point increase for the remainder of the year, meaning even a full 25bp rate hike is not fully priced in. This means the market trajectory has shifted from late July’s concern of “resumed consecutive hikes starting September” to “no move likely in September, with a residual risk of one hike by year-end.” Meanwhile, Reuters’ latest economist survey (August 12–17) was even more dovish: the vast majority of respondents expect 3.50%—3.75% to be maintained through year-end 2026.

The latest retail data further supports Goldman Sachs senior economist Matheus Dibo’s logic for predicting the Fed will "hold steady for the whole year": the key issue is not whether inflation is already at 2%, but whether previous supply shocks such as oil prices and tariffs have caused true “second-round effects.”

Dibo believes there is still room for housing inflation to decline, the job market is not overheating, and there is no wage-price spiral—thus the Fed can afford to wait for more data; the latest CPI/PPI data reinforces this judgment. Notably, this is not an entirely contrarian view from Goldman Sachs—according to a Bloomberg Intelligence survey of economists, the median forecast remains that the Fed will hold rates unchanged for the remainder of 2026. By contrast, FOMC voters Harker, Kashkari, and Logan argued for a 25bp hike in July’s 9–3 FOMC vote, and they still believe current policy is not restrictive enough and that action should be taken now.

Goldman Sachs chief macroeconomist Jan Hatzius’ latest forecast says a September rate hike is “very unlikely” unless US economic data released before the September meeting changes dramatically. In a recent report, Hatzius and his team wrote that, given global inflation is cooling, market bets on Fed tightening are still too aggressive: “Because of weak US retail sales, disappointing jobs data, and slowing inflation, the odds of a Fed rate hike in September are very small.”