Neutral estimates are much less than inflation of 6.3% as measured by the Fed’s preferred gauge. Consumers expect 4.8% inflation over the next year and 2.9% over five to 10 years, according to the University of Michigan’s survey.
For a business, that could make taking out a loan look like a bargain relative to inflation, therefore stimulating growth.
“The current level of rates is not at neutral given the configuration of inflation expectations,” said Roberto Perli, head of global policy research at Piper Sandler & Co. “That’s why the Fed thinks it has to keep tightening.”
Fed officials, taking their lead from Powell, have spent most of the year talking about getting rates to neutral as fast as possible and being deliberately vague about what happens next. That’s created a communication challenge.
“I think right now we are still in a somewhat accommodative state,” rather than neutral, Atlanta Fed President Raphael Bostic told Bloomberg TV at Jackson Hole.
Fed officials are already re-framing how they talk about neutral. During the July meeting, some participants commented that short-term neutral may be higher than their long-run estimate, according to minutes of the gathering.
Most Fed leaders have suggested they would be willing to err on the side of too-tight policy to ensure bringing down inflation and avoid an undesirable rise in inflation expectations that could be hard to reverse later on.
Some Fed officials have also begun talking more about “real rates” -- or interest rates compared to inflation. Fed presidents Thomas Barkin of Richmond and Loretta Mester of Cleveland have both called for rates to move up so that real rates are positive -- largely accomplished now.
Even so, the neutral issue is thorny enough that Bostic said his head of research, David Altig, has urged him to avoid talking about it.
“The neutral language becomes sort of confusing and not all that useful,” Altig said in a telephone interview. With short-term inflation, neutral is higher in the current environment. “The focus should not be arguing over numbers,” he said.
This article was provided by Bloomberg News.