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.
Public research record
Research framework · page evidenceCompleted application: Neutral Rate (r*)
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.
| Type | Claim | Scope |
|---|---|---|
| Release fact | The real policy rate that is neither stimulative nor restrictive — the rate that keeps inflation and unemployment at their target levels over time. | Rates |
| Release fact | 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. | Published example |
Countercase, invalidators, and sources
The relationship is conditional: another driver can dominate the same asset over the selected horizon.
- · The underlying observation changes materially.
- · The selected asset has no measurable exposure to this mechanism.
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.