New York Fed: Neutral interest rates in the first quarter remained at a low level

According to the latest information from Zhitong Finance and Economics APP, data released by the New York Fed on Friday showed that the neutral interest rate remained at a low level in the first quarter of this year. This indicates that the era of low interest rates may not be over yet. The importance of the neutral interest rate to central bank policymakers fluctuates, but its relative stability contrasts sharply with the expectations of policymakers, suggesting that the ultra-low interest rate era of the past few years may have ended.

On Wednesday, as part of the latest quarterly forecasts, Federal Reserve officials raised their estimates for the longer-term federal funds rate for the second consecutive time. The estimate was 2.5% in December last year, increased to 2.6% in March this year, and further increased to 2.8% this week. This means that Federal Reserve policymakers are becoming more optimistic about the neutral interest rate.

Federal Reserve Chairman Powell cautioned against overinterpreting the upward revision of the Fed's longer-term interest rate forecasts, noting that the neutral interest rate is "actually a theoretical concept that cannot be directly observed." Powell stated that expectations of the neutral interest rate cannot "get you to where you need to be in thinking about what's appropriate policy in the short term." However, Powell acknowledged that the long-term rate forecasts do indicate an evolution. He said, "People are starting to think that the neutral rate is unlikely to fall to the levels seen before the pandemic. But by recent historical standards, this is very low."

New York Fed President Williams also believes that the neutral interest rate is not particularly useful in making short-term tactical decisions about interest rates. However, he stated at the end of last month, "I think the factors that have been holding down rates for the past decade or so are still in play."

Despite the Federal Reserve raising interest rates by a cumulative 525 basis points since 2022, the extent of the slowdown in the U.S. economy has not been as significant as many economists and policymakers had expected. This momentum raises doubts about whether interest rates are high enough to regain control of inflation. According to public comments, Federal Reserve officials do agree that monetary policy is restrictive. Meanwhile, a recent report from the Cleveland Fed suggests that a range of monetary policy rules indicate that the current federal funds rate level of 5.25% to 5.5% is more restrictive than the 5% level suggested by these rules