--- title: "Has the Federal Reserve's policy actually become \"relatively loose\"? The new model of neutral interest rates from the San Francisco Fed provides theoretical ammunition for the hawks" type: "News" locale: "en" url: "https://longbridge.com/en/news/296188968.md" description: "The San Francisco Federal Reserve released a research report, estimating based on the medium-term neutral interest rate that the current policy rate of 3.50%-3.75% set by the Federal Reserve is in an accommodative state, challenging mainstream views. The study points out that using this indicator may more effectively stabilize inflation and achieve maximum employment, but emphasizes that the estimates carry a high degree of uncertainty" datetime: "2026-08-18T06:58:48.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/296188968.md) - [en](https://longbridge.com/en/news/296188968.md) - [zh-HK](https://longbridge.com/zh-HK/news/296188968.md) generator: "portal-rs" --- # Has the Federal Reserve's policy actually become "relatively loose"? The new model of neutral interest rates from the San Francisco Fed provides theoretical ammunition for the hawks According to the Zhitong Finance APP, a study released by the San Francisco Federal Reserve on Monday shows that if the so-called neutral rate's mid-term estimate is used as a benchmark—meaning the interest rate level where borrowing costs neither suppress nor stimulate the economy—then the current policy rate of the Federal Reserve is likely in a loose state. This latest monetary policy research from the San Francisco Federal Reserve essentially challenges the mainstream judgment among economists and Federal Reserve officials that "the current 3.50%-3.75% Federal Reserve benchmark policy rate remains broadly restrictive." This conclusion contrasts with the views of most U.S. central bank policymakers, who believe that current monetary policy is still restrictive or may have already reached a neutral level. It also conflicts with the picture painted by Federal Reserve policymakers regarding their estimates of the long-term neutral rate; according to these estimates, the current benchmark rate range of 3.50%-3.75% may be about 0.5 percentage points higher than the neutral level. **Has the Federal Reserve's policy actually become "too loose"? The San Francisco Federal Reserve's new research rewrites the judgment on the neutral rate, adding a key variable to the interest rate hike debate.** However, this new study points out that using long-term neutral rate estimates may lead to less desirable economic outcomes compared to policies based on mid-term neutral rate estimates. Vasco Curdia, a research advisor at the San Francisco Federal Reserve, wrote in the latest issue of the region's Economic Letter: "The analysis indicates that implementing monetary policy based on this indicator may more effectively stabilize inflation and achieve maximum employment compared to standard benchmarks. As of August 2026, the estimation system for the mid-term real natural rate suggests that monetary policy is in a loose state, but it is important to remember that this estimate still carries a high degree of uncertainty." According to the mid-term neutral rate indicator proposed in the paper, the current policy rate target is 0.5 to 0.75 percentage points lower than the interest rate level that would allow the economy to operate at full capacity without slowing down. Federal Reserve policymakers often use neutral rate estimates to help determine whether monetary policy is tight or loose and decide whether to raise or lower interest rates accordingly. Widely adopted monetary policy rules typically incorporate long-term neutral rate estimates, which tend to be relatively stable. Policymakers sometimes refer to short-term neutral rate estimates when discussing whether the current interest rate level is appropriate, although the latter usually fluctuates significantly. The mid-term natural rate estimate proposed by Vasco Cúrdia of the San Francisco Federal Reserve is about 1.5% in real terms, while the real policy rate derived from the current nominal policy rate minus about 3% inflation is only about 0.5%-0.75%. Therefore, from this model's perspective, the Federal Reserve's policy is actually in a certain degree of loose state. This is clearly contrary to the "tight or close to neutral" judgment made by most Federal Reserve FOMC officials based on the long-term neutral rate, although the authors of the paper themselves emphasize that the estimation range carries a high degree of uncertainty **Goldman Sachs firmly bets on no movement for the whole year! The market retreats from "continuous rate hikes" to "at most once"** Looking solely at this research paper from the regional Federal Reserve, it is clearly a hawkish report—if the policy is already below neutral levels, then theoretically there is a reason for further rate hikes to push real interest rates back to neutral; however, it is a research framework, not an official rate hike signal issued by the San Francisco Fed or the FOMC. A more explicit change has occurred in the market's consensus interest rate expectations: retail, employment, and CPI/PPI are forming an increasingly unfavorable evidence chain for hawkish rate hikes. In July, the CPI rose only 0.1% month-on-month, and core CPI rose 0.2%, with year-on-year core inflation dropping to 2.5%; subsequently, PPI was flat at 0.0%, significantly below the market expectation of +0.2%, and year-on-year dropped from 5.5% to 4.7%; combined with a surprising decrease of 23,000 in July non-farm payrolls, the reasons for the Fed to "immediately re-tighten" have significantly weakened. Therefore, what is truly interesting is that the current market is choosing to "trust economic data more than this model." After the cooling of July employment, CPI/PPI, and retail sales, the pricing data from the interest rate futures market shows that as of the latest data on August 18, the probability of a rate hike in September has dropped to about 35%, down from 52.2% a week earlier, meaning the market is currently betting approximately 65% that there will be no movement in September. Federal funds futures only account for about 21 basis points of rate hikes by the end of the year, which means that even a complete 25bp rate hike is not fully priced in. This indicates that the market's path has significantly retreated from worrying about "resuming continuous rate hikes starting in September" at the end of July to "high probability of no movement in September, with a tail risk of one rate hike remaining by the end of the year." Moreover, a recent Reuters economist survey conducted from August 12 to 17 was even more dovish: the vast majority of respondents expect the rate to remain at 3.50%—3.75% until the end of 2026. The latest retail data also makes Goldman Sachs senior economist Matheus Dibo's prediction logic of "the Fed remaining on hold for the entire year" more persuasive than a few days ago: the key issue now is not that inflation has returned to 2%, but whether previous supply shocks such as oil prices and tariffs have created a real "second-round effect." Dibo believes that housing inflation has room to continue declining, the labor market is not overheating, and a wage-price spiral has not formed, thus the Fed has time to wait for more data; the latest CPI/PPI just reinforces this judgment. It is also worth noting that this is not a completely isolated contrarian view from Goldman Sachs—Bloomberg Intelligence's previous consultation and survey of economists still showed a median forecast that the Fed would maintain interest rates unchanged for the remainder of 2026. In contrast, the three voting members Harker, Kashkari, and Logan, who advocated for a 25bp rate hike in the July FOMC with a vote of 9 to 3, still believe that the policy has not formed enough restrictions and should "act now." Goldman Sachs Chief Economist Jan Hatzius' latest forecast indicates that unless there is a dramatic reversal in U.S. economic data released before the September meeting, a rate hike in September is "very unlikely." The economist team led by Jan Hatzius wrote in their latest report that given the cooling inflation in the world's largest economy, market bets on a Federal Reserve rate hike remain overly aggressive. "Due to weak U.S. retail sales data, disappointing employment data, and slowing inflation data, the likelihood of a rate hike at the Federal Reserve's September meeting is very small." ### Related Stocks - [GS.US](https://longbridge.com/en/quote/GS.US.md) - [W4VR.SG](https://longbridge.com/en/quote/W4VR.SG.md) ## Related News & Research - [San Francisco Fed economist puts medium-run neutral rate at 1.5%](https://longbridge.com/en/news/296214012.md) - [One neutral rate estimate suggests Fed's policy stance is accommodative, paper says](https://longbridge.com/en/news/296132411.md) - [Bank of Korea deputy chief says monetary policy to be made 'very carefully'](https://longbridge.com/en/news/296558355.md) - [WRAPUP 1-Fed officials tread carefully after Treasury's bond market intervention](https://longbridge.com/en/news/296531986.md) - [A date on the calendar could shape the BOJ's endgame on interest rates](https://longbridge.com/en/news/296573309.md) --- > **Disclaimer: This article is for reference only and does not constitute any investment advice.**