The Federal Reserve cut interest rates by 25 basis points on Wednesday afternoon. As 2025 approaches, investors are focusing on the Fed’s view of the neutral interest rate in the post-pandemic economy. The Wall Street Journal’s Chief Economics Correspondent, Nick Timiraos, joins Market Domination to explore the concept of the Fed’s neutral rate. Timiraos explains that a decade ago, the Fed rarely discussed neutral rate outlooks publicly. This changed during Fed Chair Janet Yellen’s term, when she began discussing how rates would remain lower for longer due to a declining neutral rate. Timiraos defines the neutral rate as “what the right interest rate would be to … have low and stable inflation with maximum employment. What is the interest rate that best gets you there and keeps you there when there aren’t shocks hitting the economy,” though he describes this as “a nirvana-like scenario.” This neutral rate helps the Fed determine whether they should be “stepping on the gas pedal or stepping on the breaks” regarding monetary policy. However, Timiraos notes that the upcoming Trump administration’s policies are “adding more uncertainty to this” current calculation.
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