After cutting rates by over 100 basis points, the Federal Reserve is considering how to stop, but the disagreement is unprecedented.

```

After implementing an interest rate cut of more than one percentage point, officials at the Federal Reserve are facing a thorny question: where is the endpoint for policy easing?

This divergence is evolving into an unusually public debate, involving not only whether to cut rates again next week but also the direction of policy afterward. Federal Reserve Chair Jerome Powell has acknowledged that there are “strongly differing views” within the committee on how to balance the twin goals of stabilizing prices and maximizing employment.

At the core of the debate is whether the economy requires more stimulus to support the job market, or whether, given inflation remains above target and tariffs could further drive up prices, decision makers should pause for now. This situation has made every potential rate cut increasingly difficult and controversial.

Behind it all, a more abstract but increasingly important question has surfaced: what level of interest rate neither stimulates nor restrains the economy? This theoretical endpoint, known as the “neutral rate of interest,” is becoming the main focus where Federal Reserve officials find it hard to reach consensus.

Divergent Views, Neutral Rate as Focal Point

The "neutral interest rate" is a core concept in monetary policy theory. It cannot be directly observed and can only be inferred through models. Right now, Federal Reserve policymakers are working hard to pinpoint its specific level.

In the latest forecasts released in September, 19 officials provided 11 different estimates for the neutral rate, ranging from 2.6% to 3.9%. Data show this is the greatest divergence of views on the path of rates since the Federal Reserve began publishing such forecasts in 2012. Stephen Stanley, chief U.S. economist at Santander Bank, said, “We are seeing opinions 'all over the place' among officials.”

Stanley believes that as the Fed’s benchmark interest rate has reached the upper end of the forecast range, the importance of the neutral rate estimate is becoming more pronounced. He said, “For some of the more hawkish Fed members, this is starting to become a potential binding constraint,” meaning “each subsequent rate cut will become increasingly difficult.”

Philadelphia Fed President Anna Paulson also expressed similar caution in her November 20 speech. She said the dual risks of inflation and unemployment, together with the possibility that rates may be near neutral, make her cautious about the December meeting. She warned, “Monetary policy must walk a tightrope,” because “each rate cut brings us closer to the point where policy shifts from slightly restricting activity to beginning to provide stimulus.”

In addition to differing views on the current level of the neutral rate, officials also disagree on its future direction. It is generally believed that the neutral rate is driven by long-term factors such as demographics, technology, productivity, and debt burdens.

Minneapolis Fed President Neel Kashkari predicts that the widespread adoption of artificial intelligence will bring faster productivity growth, thereby raising the neutral rate as new investment opportunities boost capital demand.

However, newly appointed Fed Governor Stephen Miran believes that short-term policies should also be considered. In his first policy speech since taking office, he suggested that Trump’s tariffs, immigration restrictions, and tax cuts together have (even if only temporarily) pulled down the neutral rate, so the Fed should loosen policy substantially to avoid economic damage. In contrast, New York Fed President John Williams is skeptical of factoring in short-term changes, maintaining that global trends like population aging are keeping neutral rate estimates at historically low levels.

Divergent Interpretations of Market Signals May Become the Norm

Because the neutral rate cannot be directly observed, some policymakers tend to judge its impact through market and economic indicators. St. Louis Fed President Alberto Musalem believes that low default rates indicate financial conditions remain supportive of the economy. His colleague at the Cleveland Fed, Beth Hammack, notes that narrow credit spreads mean monetary policy, "even if tightening, is only just so."

However, interpreting clues from financial markets is no easy task. Some officials see the 10-year U.S. Treasury yield hovering around 4% as evidence that financial conditions are not restraining the economy. But others counter that these yields reflect expectations of the economic path and strong global demand for safe assets, so they have almost no reference value in estimating the neutral rate.

Analysts point out that post-pandemic price surges, uncertainty in trade and immigration policy, and the unknown impact of AI on the economy have left some wondering if divergent opinions are becoming the new normal. In addition, the Fed will face a leadership change in 2026, and Trump has vowed to appoint a new chair dedicated to lowering interest rates, which could bring in more policymakers like Miran who advocate for cheap funding.

It should be noted that, although theoretical debate about the neutral rate is intense, in actual decision making it may not be the decisive factor. Patrick Harker, former Philadelphia Fed President who retired this year, said the neutral rate is “a useful conceptual tool, but it’s just a tool and doesn’t drive policy decisions.” He added that he doesn’t recall any meeting where the entire discussion revolved around what the neutral rate is.

In Harker’s view, what really drives policy decisions will be more specific things—“labor market data and price data.” This provides a perspective for the market: regardless of how great the theoretical differences are, what ultimately affects investors' wallets will still be the economic reports released in the coming months.

Risk Reminder and DisclaimerThe market has risks; investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular situation. Investment decisions based on this article are at your own risk. ```