AEI economist Michael Strain argues the economy’s strength despite higher rates suggests the neutral federal funds rate—one that neither stimulates nor restricts growth—is significantly higher than the Fed's ~3% estimate. This implies current monetary policy may not be as restrictive as widely believed.

The Fed raised its estimate of the long-run 'neutral' interest rate—the rate that balances the economy. This technical shift means current interest rates are now considered less restrictive than previously thought, providing an underlying justification for the Fed to pursue more rate increases to achieve its desired cooling effect.

Following a major inflation surprise, the Norwegian front-end rates market rapidly priced out approximately 40 basis points of expected easing. J.P. Morgan's analysis concludes this significant move was a justified reset to a more realistic "on hold" policy outlook for 2026, rather than a speculative overreaction.

While Norges Bank forecasts an almost immediate reversal of its rate hikes after peaking, sticky inflation and currency pressures suggest a different outcome. The analyst expects a longer pause at the peak rate than what the central bank or current market pricing indicates.

The market is pricing 50 basis points of easing from Norges Bank by the end of 2026. However, strong growth, a solid labor market, and high inflation suggest the central bank will not deliver these cuts, implying that front-end Norwegian yields are biased higher.

The economy's resilience to rate hikes suggests the Fed's estimate of the neutral rate (R-star) is too low. The current model is overly influenced by the "extraordinary period" after the 2008 financial crisis. The true neutral nominal rate is likely closer to 4%, meaning current policy is still accommodative.

Norge Bank's forecast includes an implicit easing bias, but strong demand, persistent inflation, and fiscal easing make actual rate cuts improbable. The market is currently overpricing the likelihood of the central bank delivering these cuts.

Norway's recent, broad-based inflation surprise was significantly driven by rent's increased weight in the CPI basket, now at 29%. This structural factor reinforces the view that underlying inflation is sticky, compelling the Norges Bank to keep policy on hold and lean against rate cuts through 2026.

The Fed consistently underestimates inflation and growth because its policy is anchored to a flawed model (HLW) suggesting a 3.1% neutral rate. More adaptive models and real-world data from interest-rate sensitive sectors point to a neutral rate closer to 4.5%, explaining why current policy is actually stimulative, not restrictive.