The Fed nudges its long-run rate higher

The Federal Open Market Committee held its policy rate steady at 5.25–5.50 per cent in March, but quantitative analysts focused intently on a subtle adjustment in the Summary of Economic Projections. The median estimate for the longer-run federal funds rate—the committee's proxy for the nominal neutral rate—ticked upward from 2.5 to 2.6 per cent.

The Creeping Neutral Rate

While a ten-basis-point adjustment appears negligible, within the hyper-conservative consensus of the FOMC it represents a profound intellectual shift. Several members raised their individual dots above three per cent, acknowledging that structural economic momentum, higher productivity, and massive fiscal issuance are lifting the equilibrium rate of interest. The policy rate will not be returning to post-crisis lows.

The Fed’s upward revision to its long-run policy rate marks the beginning of an official institutional reckoning with a structurally higher cost of capital across the global economy.