The Lombard Review
Economy

The Fed nudges its long-run rate higher

Gradual r* revision in SEP

The north face of the Eccles Building, Washington
The north face of the Eccles Building, WashingtonPhoto: AgnosticPreachersKid / Wikimedia Commons, CC BY-SA 3.0
1 min read Data: 20 Mar hold; LR median 2.6%

The Federal Open Market Committee held its policy rate steady at 5.25–5.50 per cent in March, but quantitative analysts focused intently on a subtle adjustment in the Summary of Economic Projections. The median estimate for the longer-run federal funds rate—the committee's proxy for the nominal neutral rate—ticked upward from 2.5 to 2.6 per cent.

The trading floor of the Frankfurt Stock Exchange
The trading floor of the Frankfurt Stock ExchangePhoto: Ank Kumar / Wikimedia Commons, CC BY-SA 4.0

The Creeping Neutral Rate

While a ten-basis-point adjustment appears negligible, within the hyper-conservative consensus of the FOMC it represents a profound intellectual shift. Several members raised their individual dots above three per cent, acknowledging that structural economic momentum, higher productivity, and massive fiscal issuance are lifting the equilibrium rate of interest. The policy rate will not be returning to post-crisis lows.

Lower Manhattan seen from Jersey City
Lower Manhattan seen from Jersey CityPhoto: King of Hearts / Wikimedia Commons, CC BY-SA 4.0

The Fed’s upward revision to its long-run policy rate marks the beginning of an official institutional reckoning with a structurally higher cost of capital across the global economy.