Dallas Fed President Robert Kaplan said in an essay released yesterday that he estimation of the neutral real interest rate is in a “broad range around 0.50-0.75 percent”. And translated to nominal rate, that’s “roughly 2.50-2.75 percent”. That is, with fed funds rate at 1.75-2.00%, it would take approximately “three or four” more 25bps rate hike to reach the neutral level.
On monetary policy, he believed that Fed should “gradually” raise Fed funds rate until this neutral level. And for now, he would be “inclined to step back and assess the outlook for the economy and look at a range of other factors”. Those factors include “levels and shape of the Treasury yield curve”, before further action.
There’s clearly divergence in the emphasis of the views of Fed policy markets. Chicago Fed President Charles Evans said two weeks ago that fed fund rates might eventually enter into “somewhat restrictive” area, at roughly 0.50% above 2.75% neutral rate. Kaplan didn’t show objection to this idea but he emphasized to pause and look before acting.
On the other hand, Atlanta Fed President Raphael Bostic pledged earlier this week that he won’t vote for anything that knowingly inverts yield curve. But Kaplan said he supports raising rate to neutral before looking at the yield curve.
Full essay Where We Stand: Assessment of Economic Conditions and Implications for Monetary Policy.
