The US Federal Reserve has been increasing rates since 2016 as it implements its normalisation programme. The official US rate, known as the federal funds rate, was slashed to zero in 2008/2009 as the US economy went into a deep recession. The US central bank then kept it there for the next seven years.
However, during the latter part of those seven years, market participants had been led by the Fed to expect rates to rise to more normal levels. The US banking system was no longer at risk, the US economy had recovered and the zero interest rate policy sometimes referred to as “ZIRP”, was no longer appropriate. Thus, the ongoing discussion of monetary policy became not so much about whether rates would rise but by how much.
On 3 October during an interview, Fed Chief Jerome Powell said “Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral… We may go past neutral, but we’re a long way from neutral at this point, probably.” Powell’s statement suggested not only was there some way before the federal funds rate got to neutral but the federal funds rate could be expected to go higher.
The neutral rate is the rate at which the federal funds rate is neither stimulatory nor contractionary. As such it is a theoretical value; when a country’s economy is struggling, the neutral rate is likely to be lower than when a country’s economy is powering ahead. Different economists will provide different values as to the neutral level at any given time.