Kashkari: Long-Term Real Rates Are Already Back To Neutral

An essay Minneapolis Fed Pres Kashkari's published today muses on the neutral Fed funds rate (he estimates it at 2.0%), and the question of whether the Fed needs to move more aggressively on nominal Fed funds rate hikes given that inflation is currently high.

• He disagrees with that assessment: "While I agree real rates are more important than nominal rates in driving economic activity, I believe it is long-term real rates — say 5 years, 10 years or longer — rather than overnight rates that influence business and consumer demand for credit."
• On that front, he thinks that real long-term rates have already returned to their pre-pandemic level. Therefore the most important policy going forward is that "the FOMC must follow through on the forward guidance of federal funds rate increases and balance sheet reduction that we have already signaled in order to validate the repricing that has taken place in financial markets."
• A caveat: "If the economy is in fact in a higher-pressure equilibrium, that might indicate the neutral long-term real rate has increased, which would then require even higher rates to reach a contractionary stance that would bring the economy into balance."