The policy rate that neither stimulates nor restrains the economy once inflation is at target; unobservable, estimated, and the anchor for the long end of the curve.
Neutral is defined in real terms. Add the inflation target to get the nominal neutral rate, which is roughly what the longer-run dot-plot projection represents. Above neutral policy is restrictive, below it policy is stimulative.
Estimates are noisy and drift with productivity growth, demographics and the global supply of savings. That uncertainty is itself a market driver: when investors revise r-star upward, long yields rise even with no change in the near-term policy path.
Example: estimated real neutral is 0.9% and the target is 2%, so nominal neutral is about 2.9%. With the target-range midpoint at 4.375%, policy is roughly 150 basis points restrictive.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
Educational only, not advice. Spotted an error? Post in Site Feedback.