Atlas Macro

Central banks

Neutral Rate

The interest rate that neither speeds up nor slows down the economy when it is at full employment with stable inflation. Economists write the inflation-adjusted version as r* (r-star).

Key points

  • Can't be observed; it is estimated, and estimates vary widely.
  • Policy is called restrictive when rates are above neutral and accommodative when below.
  • Fed officials' median estimate of the long-run neutral rate rose from 2.5% in 2019-2023 to about 3% by 2025.

Example

If the neutral rate is 3% and the Fed's rate is 5%, policy is restrictive and should be slowing the economy.

In history

Estimates of r* fell sharply after 2008, which helped explain why very low rates did not cause inflation in the 2010s. Since 2022 many economists argue it has risen, which would mean rates need to stay higher than in the 2010s.

Related terms