A San Francisco Fed research paper suggests that US monetary policy may be more accommodative than commonly assessed when measured against a medium-term estimate of the neutral interest rate. According to Reuters reports, the research was authored by Vasco Curdia, a research adviser at the San Francisco Fed, who found that the current federal funds target range is around 0.5 to 0.75 percentage point below the level indicated by the medium-term neutral-rate measure. This finding contrasts with the view of many U.S. central bank policymakers, who have generally assessed monetary policy as restrictive or close to neutral, and differs from estimates of the longer-run neutral rate that suggest the Fed's current benchmark interest-rate range of 3.50%-3.75% remains roughly half a percentage point above a neutral level.
Federal Reserve officials are showing signs of division on monetary policy direction following the July 9-10 meeting's 9-3 decision to maintain interest rates at 3.50%-3.75%. According to Bloomberg News reports, Beth Hammack of the Cleveland Fed has emerged as a key voice cautioning against the pause, expressing skepticism that the recent inflation slowdown will persist. This divergence from Goldman Sachs Vice Chairman Robert Kaplan's support for the July pause highlights the complex dynamics facing Fed policymakers as they navigate competing inflation pressures and geopolitical tensions. The San Francisco Fed research suggests that if policymakers place greater weight on the medium-term neutral rate, the current policy stance could be viewed as less restrictive than conventional measures suggest, potentially influencing future discussions over the timing and pace of potential interest-rate adjustments.
The Fed's July decision came as policymakers weighed recent data showing consumer prices rose 0.1% in July and 3.4% from a year earlier, compared with a 3.5% annual increase in June. Core inflation, which excludes food and energy, increased by 0.2% for the month and 2.5% annually, with its annual rate easing from 2.6% in June. However, recent developments have intensified concerns about inflation persistence, with geopolitical tensions including Iran conflict and oil price spikes influencing Fed rate hike discussions. The Fed's July statement noted that inflation remained elevated partly because supply shocks had raised prices in sectors including energy, with the energy index remaining 14.7% higher than a year earlier.
Kaplan identified several forces that could prevent inflation from returning quickly to the central bank's target, including AI investment that is increasing demand for power, construction materials, data centers, and specialized workers. He also cited tariffs, labor constraints, and high oil prices as sources of upward pressure. The latest geopolitical developments, including Iran conflict and oil price spikes, have added complexity to these inflation dynamics. The Fed's July statement said inflation remained elevated partly because supply shocks had raised prices in sectors including energy, with the energy index remaining 14.7% higher than a year earlier. However, Kaplan noted that AI adoption could lower inflation by helping businesses improve productivity and produce more with the same amount of labor and capital.
Kaplan expressed more concern about long-term U.S. Treasury yields than the federal funds rate itself, linking rising yields mainly to persistent fiscal deficits rather than Fed policy decisions. The Treasury's August 13 auction of $25 billion in 30-year debt was sold at a yield of 5.22%, up from 5.06% at the previous auction in July and the highest borrowing cost for a 30-year Treasury sale since 2001. Following the July CPI release, prediction-market traders placed a 67% probability on another pause in September, according to recent market coverage. The San Francisco Fed research suggests that a medium-term measure could strike a better balance between the stability of longer-run estimates and the volatility of short-run measures, potentially influencing how policymakers assess future monetary policy adjustments.
Market performance has shown mixed reactions to the Fed's diverging views, with S&P 500 and Nasdaq up while the Dow Jones Industrial Average dipped slightly. The SpaceX stock surge has contributed to market performance mixed, with the company's valuation climbing to $200 billion driven by Starlink and Starship developments. The San Francisco Fed research emphasizes that significant uncertainty surrounding neutral-rate estimates means the measure is unlikely to provide policymakers with a definitive signal on its own. Fed officials continue to weigh a broad range of economic indicators when determining the appropriate path for monetary policy, with the competing views among Fed officials explaining why Kaplan wants the central bank to retain flexibility as policymakers still need to decide whether recent inflation improvement will continue or whether energy, tariffs, and business investment will keep inflation elevated.
