Spotlight on Powell's Definition of "Just Below Neutral"

Fed Chair Jerome Powell stated on Wednesday that interest rates are "just below neutral". That's quite a position.

Effective Fed Funds Rate

The Effective Fed Funds Rate is 2.2%. Neutral is 3.0%.

Lovey-Dovey Interpretation of Powell Speech Sends Stocks Flying

On Wednesday I commented Lovey-Dovey Interpretation of Powell Speech Sends Stocks Flying.

Here's the exact statement from Powell under discussion.

Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth.

Debate Over "Just Below"

Powell has an out. The media focuses on "just below".

Powell stated just below the "broad range of estimates".

The lead chart from the WSJ "Daily Shot" shows the "median prediction" not the "broad range".

Dot Plot

Compared to the median, the Fed needs just over three more hikes to get to neutral. Compared to the "broad" range. we are already there.

That was a carefully crafted statement by Powell.

Mike "Mish" Shedlock

Comments (9)
No. 1-8
JG1170
JG1170

Chairman Maowell knows just the right things to say to appease the people.

gregggg
gregggg

IOW, it's just a matter of time before the long term rates will converge with the short term rates. He's a bit easier to read than Yellen.

Schaap60
Schaap60

If I understand "just below the broad range of estimates of the level that would be neutral" correctly, current rates aren't even at the bottom of a broad range of what is believed to be neutral. Thus, if the goal is to just get to the middle of the "broad range" of estimates of the neutral rate, several more (probably 3 or 4) increases are needed. How will the stock market react to that? I would add the mortgage market reaction, but I sense the economy will be on the edge with those rate increases so I'm less sure long-term rates rise with short-term rates.

As an aside, I love how there is no agreement at the Fed about what the neutral rate is, but they will apparently know when they get there. What can go wrong?

Matson
Matson

Soon we'll here about five year plans..... This kind of double speak is getting nauseating....

channelstuffing
channelstuffing

Now that Powell is obviously el presidente's bitch,look for holiday rate cut,and wait for it...........multi trillion dollar infrastructure deal in 2019.The printing presses will run till the bearings melt in 2019!

RonJ
RonJ

A broad range shows just how clueless the FED is as to where neutral really is. What if they have already passed it? Which really brings up the question, what is neutral anyway, other than an artificial definition that can't be maintained. The FED sat at ZERO-.25% for years on end, while running multiple QE campaigns. Attaining neutral became a pipe dream. The FED could get up to so called neutral and wind up in a recession as soon as they get there. They would then need to redefine neutral.

pi314
pi314

The FED is basically clueless. The dot plot chart shows that even one year out, their top and bottom estimates are 150 basis points apart!

Kinuachdrach
Kinuachdrach

One of many things I do not understand about central banking and the manipulation of interest rates -- money circulates in an economy; one person's liability is another person's asset. If interest rates go up, borrowers have less free cash to spend while lenders have more interest income to play with. How does that switch in distribution speed up or slow down the growth of the economy?

What really drives (per capita) growth in an economy is new resources, new technology, improved efficiency. Interest rates have only a tenuous connection to those true sources of economic growth. Perhaps we have all been victims of false doctrine, including the central bankers playing with their interest rates?