by Calculated Risk on 12/09/2025 02:07:00 PM

Today, in the Calculated Risk Real Estate Newsletter: Lawler: More on the “Neutral” Interest Rate (R*)

A brief excerpt:

From housing economist Tom Lawler:

Executive Summary: Policymakers and financial analysts looking for “models” as a guide for assessing the neutral interest rate are faced with a dilemma: various models produce significantly different results, and it is far from clear which if any model is the “most” accurate. While it is perhaps interesting to note that the average R* estimate from various models available within the Federal Reserve System is currently very close to “market-based” estimates based on TIPS forward rates adjusted for term prema estimates, that may simply be a coincidence.

However, if one takes the approach that the “best guess” estimate of R* is found by looking at the average of various models and the “market’s” assessment of R*, one would come to the conclusion that the current “best guess” estimate of the neutral real rate of interest is very close to 1.5%,

If that is the case, and if, as expected, the FOMC decides to cut its federal funds rate target by 25 bp tomorrow, then the resulting level of the federal funds rate will be very close to the neutral nominal policy rate.

There is much more in the article.