San Francisco Fed economists estimate the medium-term neutral interest rate to be 1.5%, suggesting that Federal Reserve policy is "dovish".

According to Golden Ten Data APP, a new study by San Francisco Fed economist Vasco Cúrdia estimates that the medium-term neutral rate for the US economy is around 1.5%, but this estimate comes with significant uncertainty. This estimated value suggests that the current Fed policy rate may in fact be accommodative.

This indicator aims to measure the natural rate over the medium term and is an important benchmark for assessing whether monetary policy is tight or loose. The San Francisco Fed defines the natural rate as the real short-term interest rate when the economy is operating at its potential growth rate.

What does a 1.5% neutral rate mean?

Cúrdia's research adopts a medium-term estimation approach, aiming to smooth out the sharp fluctuations and statistical noise commonly found in short-term estimates. The resulting 1.5% estimate is noticeably higher than levels implied by some earlier models.

If we assume a potential inflation rate of at least 2.5%, then a 1.5% real neutral rate would correspond to a nominal neutral policy rate of around 4%. In other words, when the Fed's policy rate is below 4%, monetary policy is still theoretically accommodative; conversely, if it is above 4%, it begins to restrain the economy.

Currently, the Fed's policy rate remains in the range of 3.5% to 3.75%. In other words, the Fed is not “hitting the brakes” but rather still “stepping on the gas.”

This conclusion differs significantly from the majority of Fed officials’ current opinion that monetary policy is restrictive or at most near neutral.

Significant changes in the estimation of the natural rate

Cúrdia's research also shows that estimates of the natural rate have changed significantly over time. The chart below shows that from the late 1980s to the 1990s, estimates of the natural rate were at relatively high levels; around the 2008 global financial crisis, estimates slipped into negative territory and have gradually rebounded in recent years.

It is especially important to note that the neutral rate is not a directly observable economic variable, but instead is a theoretical value estimated based on specific economic models. Differences in model design, data selection, and parameter assumptions can all lead to significant deviations in results.

Cúrdia also admits that the 1.5% estimate still carries considerable uncertainty.

The market still expects the Fed to hold steady in September

Currently, market pricing shows about a 69% probability that the Fed will keep rates unchanged in September; for the December meeting, investors only expect one more rate hike this year. US CPI, PPI, and employment data all signal cooling, causing the market to reassess the necessity of continued Fed tightening.

Goldman Sachs believes that, ahead of the September FOMC meeting, there will not be enough members turning hawkish to trigger a rate hike. Unless upcoming August economic data shows unexpected and sharp changes, the Fed will keep rates steady.

It is worth noting that the US Treasury market is currently experiencing intense volatility: the 30-year US Treasury yield once surged to 5.3%, the highest level since 2007, reflecting deep-seated market concerns about long-term inflation, fiscal deficits, and the Fed’s policy path. This phenomenon marks a profound revaluation of US Treasury pricing logic and presents the Fed with a policy dilemma it has never faced before.