Federal Reserve Officials Search for the Elusive ‘Neutral’ Interest Rate
To investors, Chairman Jerome Powell’s comments appear contradictory.
The word “neutral” is usually as boring as beige. But not when it’s coupled with “interest rate.” Stocks leaped on Nov. 28 when Federal Reserve Chairman Jerome Powell opined that short-term interest rates were just below their “neutral” range. Investors concluded that the central bank was almost done raising interest rates, sending the Dow Jones industrial average up 618 points, or 2.5 percent.
Powell, 65, is a seasoned Washington lawyer, ex-Treasury official, and former private equity executive who served on the Fed’s Board of Governors for six years before President Trump elevated him to chairman in February. He knows all about message discipline. Yet in alluding to the neutral interest rate, he waded into one of the biggest controversies in economics. Even within the Fed’s Federal Open Market Committee (FOMC), which sets the target for the benchmark federal funds rate, there’s deep disagreement on the topic.