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Cleveland Fed economists present estimates of the nominal neutral interest rate from a newly developed model
A model developed by a Cleveland Fed economist estimates the medium-run nominal neutral interest rate to be 3.7 percent, based on data through the second quarter of 2025.
“With the nominal federal funds rate currently in the range of 4.25 percent to 4.5 percent, the Zaman model estimates the policy stance to be in restrictive territory with a high level of certainty, at a 77 percent probability,” Saeed Zaman and Taylor Horn write in a new Economic Commentary.
The neutral interest rate is the rate at which the federal funds rate neither restricts nor stimulates the economy. The rate can’t be observed directly and thus can be difficult to estimate precisely. Because of this challenge, “many central banks maintain a suite of models to infer the neutral interest rate for their respective economies,” the authors write.
“To infer the neutral interest rate, the Zaman model assumes a richer structure and conditions on more information, including survey data, than do existing models,” they write.
Read the Economic Commentary: Neutral Interest Rates and the Monetary Policy Stance
Further reading: A Unified Framework to Estimate Macroeconomic Stars
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Media contact
Chuck Soder, chuck.soder@clev.frb.org, 216.672.2798
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The Federal Reserve Bank of Cleveland (commonly known as the Cleveland Fed) is part of the Federal Reserve System, the central bank of the United States.