The neutral interest rate fairytale

Source: Cobden Centre
by Dr. Frank Shostak

“On April 19, 2022 at the Economic Club in New York, the Chicago Federal Reserve Bank President Charles Evans said the Fed is likely to lift by year-end its federal funds rate target range close to the neutral range of between 2.25% to 2.5%. Furthermore, on April 21, 2022, Fed Chairman Jerome Powell corroborated this by stating that the Fed wants to raise its benchmark rate to the neutral level. By popular thinking, the neutral rate is one that is consistent with stable prices and a balanced economy. Hence, by this thinking in order to attain economic and price stability, Fed policy makers should navigate the federal funds rate towards the neutral rate range. … In order to extract the unobservable neutral interest rate, economists employ sophisticated mathematical methods. However, does all of this make much sense?” (05/10/22)