San Francisco Fed economists estimate the mid-term neutral interest rate at 1.5%, suggesting that the Federal Reserve's policy is "accommodative."

The latest research by Vasco Crdia, an economist at the San Francisco Fed, estimates that the medium-term neutral interest rate for the U.S. economy is approximately 1.5%, but this estimate carries significant uncertainty. This estimate suggests that the current policy interest rate set by the Federal Reserve may be in an accommodative state. This indicator aims to measure the natural rate over the medium term and serves as an important benchmark for assessing whether monetary policy is tightening or loosening. The San Francisco Fed defines the natural rate as the actual short-term interest rate when the economy operates at its potential growth rate. What does a 1.5% neutral rate mean? Crdia's research adopts a medium-term measurement approach designed to smooth out the sharp fluctuations and statistical noise often present in short-term estimates. The resulting estimate of 1.5% is notably higher than the levels implied by some earlier models. Assuming a potential inflation rate of at least 2.5%, a 1.5% real neutral interest rate corresponds to about a 4% nominal neutral policy interest rate. In other words, when the Federal Reserve's policy interest rate is below 4%, monetary policy is theoretically still accommodative; conversely, if it is above 4%, it begins to exert a restraining effect on the economy. Currently, the Federal Reserve's policy interest rate remains in the range of 3.5% to 3.75%. In other words, the Fed is not "pressing the brakes" but is still "pressing the accelerator." This conclusion significantly diverges from the views of most Federal Reserve officials, who currently believe that monetary policy is restrictive or at least close to neutral. Significant changes in the estimation of the natural rate Crdia's research also shows that the estimation of the natural rate has changed significantly over time. The chart below indicates that from the late 1980s to the 1990s, the estimate of the natural rate was at a relatively high level; around the time of the 2008 global financial crisis, the estimate fell into negative territory and has gradually recovered in recent years. It is important to point out that the neutral rate is not a directly observable economic variable but rather a theoretical value estimated based on specific economic models. Differences in model specifications, data selection, and parameter assumptions can lead to significant deviations in results. Crdia also acknowledged that the 1.5% estimate still carries substantial uncertainty. Markets still expect the Fed to hold steady in September Current market pricing shows that the probability of the Fed maintaining its interest rate in September is about 69%; by the December meeting, investors anticipate only one more rate hike for the rest of the year. U.S. CPI, PPI, and employment data have simultaneously signaled a cooling, prompting the market to reassess the necessity for the Fed to continue tightening its policy. Goldman Sachs believes that ahead of the September policy meeting, not enough members of the Federal Open Market Committee will shift to a hawkish stance to trigger a rate hike. Unless unexpected violent movements occur in the upcoming August economic data, the Fed is likely to maintain its interest rates. It is worth noting that the current U.S. Treasury market is experiencing significant turmoil, with 30-year Treasury yields spiking to 5.3%, the highest level since 2007, reflecting deep market concerns about long-term inflation, fiscal deficits, and the Fed's policy trajectory. This phenomenon indicates that the pricing logic of U.S. Treasuries is undergoing a profound re-evaluation, and the Fed faces an unprecedented policy dilemma.