The Fed's rate hikes fail to address the root causes of inflation in housing, education, and healthcare. These sectors suffer from structural issues like regulation and bureaucracy. Higher rates can even be counterproductive, for instance, by stifling new housing construction, which restricts supply.

When bond prices exhibit short-term mean reversion (up one day, down the next), it's a quantitative sign of deep uncertainty. This reflects the market and the Fed struggling to choose between fighting inflation and addressing weakening employment, leading to no clear trend until one indicator decisively breaks out.

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.

The Federal Reserve’s recent policy shift is not a full-blown move to an expansionary stance. It's a 'recalibration' away from a restrictive policy focused solely on inflation toward a more neutral one that equally weighs the risks to both inflation and the labor market.

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.

The global shift away from centralized manufacturing (deglobalization) requires redundant investment in infrastructure like semiconductor fabs in multiple countries. Simultaneously, the AI revolution demands enormous capital for data centers and chips. This dual surge in investment demand is a powerful structural force pushing the neutral rate of interest higher.

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.