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Majority sees neutral interest rate between 1% to less than 2%

Published on June 25, 2024
Current Context: The neutral interest rate is a critical concept in economics and monetary policy. It represents the rate at which the economy operates at full employment and capacity, with stable inflation.
Majority sees neutral interest rate between 1% to less than 2%
  • Here are some key points:
    • Definition: The neutral rate is the rate at which the economy is neither stimulated nor slowed down. It’s not directly observable but estimated based on various analyses and observations.
    • Importance: Knowing the neutral rate helps central bankers assess whether their monetary policy is accommodative, neutral, or restrictive. Interest rates are a key tool for adjusting economic activity.
    • Estimates: Estimates vary, but some widely cited figures put the real (inflation-adjusted) neutral rate around 0.6% in the United States. Looking ahead, the federal funds rate could eventually target a range between 2% and 3%.

Question:

1 What does the neutral interest rate represent in economics?

  • A) The rate at which banks lend to each other overnight
  • B) The rate at which the economy operates at full employment and stable inflation
  • C) The rate set by central banks to encourage borrowing
  • D) The rate at which inflation is exactly zero
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