Neutral Interest Rates and the Monetary Policy Stance

Taylor N. Horn and Saeed Zaman
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Taylor N. Horn: https://www.clevelandfed.org/people/profiles/h/horn-taylor-n

Economic Commentary, 2025, vol. 2025, issue 08, 12

Abstract: The neutral interest rate (r-star) is an important input in monetary policy discussions and is commonly used to assess the stance of monetary policy. This Economic Commentary presents estimates of the neutral interest rate from a recently developed model and provides a high-level description of this new model. With data through 2025:Q2, the model estimates the implied (medium-run) nominal neutral interest rate to be 3.7 percent, with a 68 percent coverage band ranging from 2.9 percent to 4.5 percent. Given that the effective nominal federal funds rate is currently in the range of 4.25 percent to 4.5 percent, this model estimates with a high level of certainty (77 percent probability) that the policy stance is in restrictive territory.

Date: 2025
Note: The updates to the estimates of neutral interest rate (r-star) from the Zaman model reported in this Economic Commentary are available at openICPSR, https://doi.org/10.3886/E227362V1.
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DOI: 10.26509/frbc-ec-202508

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