Rates

Neutral Rate (r*)

The real policy rate that is neither stimulative nor restrictive — the rate that keeps inflation and unemployment at their target levels over time.

Definition

Neutral rate (r*) is the long-run equilibrium real rate. It's unobservable and must be estimated; the NY Fed publishes Holston-Laubach-Williams (HLW) estimates that are widely cited.

A rising r* implies the Fed needs higher nominal rates to be neutral; a falling r* implies the opposite.

Why it matters

Every assessment of whether policy is tight or loose depends on r*. Misestimating it is one of the most common policy errors and a frequent driver of duration mispricing.

Worked example

2024: FOMC dot plot raised the longer-run rate forecast to 2.9% from 2.5%, implying a higher r* and reframing 'how restrictive is current policy' across markets.

Frequently asked

Why is r* unobservable?⌄

It's defined by counterfactual conditions (full employment, target inflation), which never hold exactly.

What raises r*?⌄

Higher trend productivity, looser fiscal policy, weaker savings glut, demographics that lift the demand for capital.

How does r* differ from the terminal rate?⌄

Terminal rate is the peak in this cycle; r* is the long-run equilibrium. They're not the same.

Does r* affect equity valuations?⌄

Indirectly, through long-run real rates that anchor discount rates.

Related terms

Real Yield

Rates

Term Premium

Rates

Policy Error

Policy

Soft Landing

Macro

Trade neutral rate (r*) setups in real time

Cross-domain macro intelligence. Policy to prices. 7-day free trial.

Get Started