Federal Reserve policy makers are discovering they likely need to shift into an even lower gear if they are to speed up the U.S. economy.

Chairman Jerome Powell and colleagues last week estimated that the so-called neutral interest rate -- the level which neither stimulates nor restricts growth -- now sits around 2.5%, down from 2.75% in March and as high as 4% in 2014.

That means the Fed’s current benchmark of 2.25%-2.5% is unlikely to provide the power policy makers once assumed it would, leaving eight of them anticipating they will have to reduce rates this year amid growing risks to the economic outlook.

“This is really important,” said Torsten Slok, chief economist at Deutsche Bank Securities, who expects a rate cut in July. “For many years, the Fed has been arguing that monetary policy was easy and accommodative and supporting growth and inflation. After a decade of easy monetary policy, the Fed has decided that policy is no longer stimulative.”

Reasons listed for the lower neutral rate include ongoing fallout from the financial crisis, weaker productivity, continued slackness in the labor market and an aging population, which when combined leave the economy structurally weaker and so more vulnerable to rate hikes.

The upshot is the Fed may have to lower rates if it wants to boost expansion to offset global headwinds, including slow global growth and trade disruptions from President Donald Trump’s tariff battles.

Powell will give his view of policy in a speech on Tuesday to the Council on Foreign Relations in New York.

Futures Contracts

Fed funds futures contracts are pricing in at least a 25-basis-point cut in July, with roughly 44% chance of a 50 basis-point cut. Those expectations for a steeper drop in the policy rate have grown in the days since Powell signaled a willingness to act swiftly “as needed” to protect the economy.

“They have come to the conclusion that growth is slowed by productivity and demographic factors that predate the Great Recession and that are not reversing soon,” said Jonathan Wright, a Johns Hopkins University economics professor and a former Fed researcher.

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