Defense and Compliance Attorneys
The phrase refers to a current debate inside the Federal Reserve about how far to keep cutting interest rates and what the “neutral” long‑run interest rate really is, with officials more split than at any time since the Fed began publishing individual forecasts in 2012.
What the article is about
Recent coverage describes how, after cutting the federal funds rate by more than 1 percentage point this year, Fed policymakers disagree sharply on where rates should ultimately settle once the cutting cycle ends. The disagreement shows up in the Fed’s “dot plot,” where 19 officials now submit 11 different estimates for the long‑run or neutral rate, ranging from roughly 2.6% to 3.9%.
Why the Fed is divided
Officials are split over competing risks: some emphasize still‑softening labor market conditions and argue for more cuts to support employment, while others focus on inflation remaining above the 2% goal and the risk that new tariffs could push prices higher, arguing for caution. Chair Jerome Powell has publicly acknowledged “strongly differing views” on how to balance the Fed’s dual mandate of maximum employment and stable prices in this environment.
What “neutral rate” means here
The neutral rate (often called r\*) is the policy rate that neither stimulates nor restrains the economy once inflation is at target. Because no one can observe it directly, officials infer it from data on growth, inflation, and financial conditions—and those inferences now differ much more than usual, leading to a wider spread of long‑run rate projections.
Why this matters for markets and the economy
A wider split on the long‑run rate and on upcoming cuts means less clarity about the path of borrowing costs for households, firms, and investors. Markets are currently pricing a high probability of another cut at the December 9–10, 2025 meeting, but the visible disagreement raises the odds of close votes, policy surprises, and more sensitivity of stocks and bonds to each new data release.
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