The Fed's own forecasts for unemployment (4.3%) and inflation (core PCE at 0.22/month) are already being surpassed by current data trends. This creates a low bar for hawkish action, suggesting the market is underpricing the probability of future rate hikes.

At 4.325%, the current Fed Funds rate is right at its 70-year median. This historical context, combined with large fiscal deficits, supports a contrarian view that monetary policy is actually accommodative or neutral, not restrictive as often claimed.

Fed Governor Stephen Myron argues Trump's policies will lower the neutral rate, necessitating aggressive rate cuts. Conversely, Bloomberg Economics’ model suggests these same policies—like massive government borrowing and fracturing trade alliances that reduce foreign capital inflows—will significantly increase the neutral rate, highlighting the concept's deep ambiguity in practice.

Because the neutral rate of interest (R-star) is a theoretical, unobservable concept, policymakers can manipulate its estimated value to justify their desired interest rate policies. This allows them to argue for rate cuts or hikes based on a non-falsifiable premise, making it a convenient political tool rather than a purely objective economic guide.

Robert Kaplan argues that with inflation at 2.75-3%, the neutral Fed funds rate is ~3.5-3.75%. Since the current rate is 3.75-4%, another cut would place policy at neutral, not accommodative. This is a risky position when inflation remains well above the 2% target, leaving no room for error.

Despite nominal interest rates at zero for years, the 2010s economy saw stubbornly high unemployment and below-target inflation. This suggests monetary policy was restrictive relative to the era's very low "neutral rate" (R-star). The low R-star meant even zero percent rates were not stimulative enough, challenging the narrative of an "easy money" decade.

Modern Western economies are dominated by services (media, law, medicine) that are not capital-intensive and don't rely heavily on borrowing. This diminishes the impact of interest rate changes on the real economy, explaining why aggressive rate hikes haven't caused a recession and why low rates post-2008 didn't create inflation.

The Federal Reserve's anticipated rate cuts are not a signal of an aggressive easing cycle but a move towards a neutral policy stance. The primary impact will be modest relief in interest-sensitive areas like housing, rather than sparking a broad consumer spending surge.

A single neutral interest rate may not exist. There could be one R-star for the investment-heavy AI sector and another for housing. A separate R-star might even be needed for financial stability. This divergence means the Fed faces a policy trade-off where a rate that balances one part of the economy could destabilize another.