We are starting to get more discussion about neutral rates from the Fed. This is a positive sign as it means they are actively assessing whether they are restrictive at current levels. In my view, the chart below perfectly illustrates the disconnect. They focus on real rates, and ignore the easing in financial conditions. In my view, the disconnect highlights why the real rate framework is missing something. You would not expect FCI to loosen in response to rising real rates, which tells you something has changed.
A couple weeks ago, Lorie Logan gave a speech in Dallas and discussed uncertainty about the neutral rate. She discussed a range of models, with some indicating neutral could be where the Fed Funds rate currently is.
Kashkari also pointed to evidence that the strength and length of economic resiliency makes the case that neutral may be structurally higher.
