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The Fed's New Focus on the Neutral Rate
Description
With the effective fed funds rate at 3.63% and inflation running hot at 4.2%, the Federal Reserve faces a tricky question: how high is 'high enough'? In this episode, Lucas and Luna break down why the neutral rate of interest — R-star — has become the Fed's obsession in mid-2026. They explore how the post-pandemic economy, energy shocks, and structural changes have likely pushed R-star higher, complicating the FOMC's tightening path. Drawing on recent data including the ten-year breakeven inflation rate of 2.31% and the surprise ECB rate hike, they explain why estimating the neutral rate is more art than science — and why getting it wrong could either keep inflation too high or choke off growth. A focused look at the one number that might matter most to the Fed right now.