Federal Reserve’s Kashkari questions number of rate cuts to achieve neutrality

Key Takeaways

• Federal Reserve’s Neel Kashkari highlighted uncertainty about the number of rate cuts needed to reach a neutral policy rate.
• Recent and expected rate cuts in 2025 coincide with a Fed shift toward an easing cycle, but the ‘neutral rate’ is higher than pre-pandemic levels.

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Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, expressed uncertainty today about how many additional rate cuts would be needed to reach a neutral policy stance.

Kashkari and other Fed officials now estimate the neutral rate could be around 3.1%, higher than pre-pandemic levels of 2-3%. The elevated estimate suggests fewer cuts might be necessary to reach the theoretical rate where monetary policy neither stimulates nor restrains economic growth.

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The uncertainty about the neutral rate echoes debates from the 2010s when rates were held low for extended periods to aid recovery, contrasting with the Fed’s aggressive cuts to near-zero during the COVID-19 era in 2020.

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