December 12, 2024 at 6:00AM EST -- Of course, they know what it is. That’s fairly straightforward: the level of benchmark interest rates that neither boosts nor slows the US economy. They just can’t quite figure out, though, how to calculate it with any precision in an economy that’s still adjusting to all the shocks it got on both the supply and demand side during the pandemic.
In other words, the stakes are raised in the bond market. Get the neutral-rate call wrong and you can lose a lot of money, an unnerving prospect for a group still trying to recoup the losses they racked up during a brutal three-year selloff that ran through last fall. For years, the neutral rate was widely considered to be pretty low. There were disagreements about the exact level, of course, but a broad consensus formed during the long, sluggish expansion that followed the 2008 financial crisis that it hovered somewhere around 2.5%.
Policy makers’ estimates of the long-run interest rate — broadly seen as a proxy for the neutral rate — are as low as 2.375% and as high as 3.75%. That’s the widest range since the Fed began publishing the figures over a decade ago. Officials will update their estimates when they huddle next week for a policy meeting in which they’re widely expected to to cut the benchmark rate another quarter point to a range of 4.25% to 4.5%.
“You don’t know where the Fed is going to go. So you have to be either beholden to their volatility,” Kennedy says, “or you need to respect that there’s a lot of outcomes and you should really not be taking excessive risk here.”Then there’s the camp that has a strong belief in their neutral-rate call and wants the chance to parlay it into a big score for clients. “This is exactly what people wanted,” says Max Kettner, chief multi-asset strategist at HSBC Global Research.