What it is
The neutral rate, often referred to as r-star, is a theoretical interest rate that allows the economy to grow at its potential without causing inflation to accelerate or decelerate. It's the rate at which monetary policy is neither expansionary nor contractionary. The neutral rate is unobservable and can change over time due influenced by factors like productivity growth, demographics, and global demand for safe assets.
Federal Reserve policymakers regularly estimate the neutral rate as a guide for setting the federal-funds-rate and assessing the appropriate stance of monetary policy. If the actual federal-funds-rate is below the neutral rate, monetary policy is considered stimulative; if it's above, policy is restrictive. Debates about the current level and trajectory of the neutral rate often arise in discussions about the Fed's forward-guidance and long-term interest rate expectations.
Why it matters
The neutral rate helps explain Federal Reserve policy decisions, influencing whether interest rates will rise or fall, affecting your borrowing and investments.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice