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Questions on the Neutral Rate and Labour Market Strength

FED
  • Q: Does the increase in the neutral rate mean the economy has changed that mean higher rates will be needed in the future?
    • A: You're right. There's an uptick in the longer run rate and a 25bp increase in '25 and '26. I don't think we really know that rates are going to be higher in the long run. My instinct is that rates will not go back to the very low levels. All around the world rates were at or below zero in some cases. I don't see rates going back down to that level but I think there's tremendous uncertainty about that.
    • The higher year-end core inflation projection reflects the data we've seen so far this year.
    • If you look at the SEP, it is still likely in most people's view that we will achieve that confidence and that there will be rate cuts. But that is really going to depend on the incoming data. In the second half of the year you have some pretty low readings, so it might be harder to make progress as you move that 12-month window forward.
  • Q: Would labor market strength be a reason to hold off on rate cuts?
    • A: If we're getting a lot if supply and a lot of demand, then supply is feeding demand because workers are getting paid and spending. But in fact inflation is decreasing with strong hiring last year - strong hiring by itself wouldn't be enough to hold off on rate cuts.
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