A new study from the Federal Reserve Bank of San Francisco, released Monday, suggests that by one key measure, the central bank's current policy rate might actually be sitting in accommodative territory. The analysis centers on the so-called neutral rate—the level of borrowing costs that neither stimulates nor restrains economic growth—and specifically, a medium-run estimate of that rate.
This research challenges the prevailing view among many economists and Fed officials that the current benchmark policy rate of 3.50% to 3.75% remains broadly restrictive. The conclusion contrasts with the majority opinion among US central bank policymakers, who see current policy as either restrictive or potentially neutral. It also conflicts with the picture painted by policymakers' own estimates of the long-run neutral rate, which typically suggest the current policy range is about half a percentage point above neutral.
The paper argues that using a medium-run neutral rate estimate could yield better economic outcomes than relying on long-run estimates. In the latest edition of the region's Economic Letter, San Francisco Fed research advisor Vasco Cúrdia writes that analysis indicates using this measure could be more effective at stabilizing inflation and achieving maximum employment than standard benchmarks. As of August 2026, estimates of the medium-run real natural rate suggest monetary policy is loose, though he cautioned that this estimate remains highly uncertain.
According to the paper's medium-run neutral rate gauge, the current policy rate target sits 0.5 to 0.75 percentage points below the level that would allow the economy to run at full capacity without slowing it down. Fed policymakers frequently use neutral rate estimates to help determine whether policy is tight or loose, informing decisions on whether to raise or cut interest rates. Widely used policy rules typically incorporate long-run neutral rate estimates, which tend to be relatively stable. Some policymakers also reference short-run estimates when discussing the appropriateness of current rates, though these tend to be highly volatile.
Cúrdia's proposed medium-run natural rate estimate is around 1.5% in real terms. With the current nominal policy rate minus roughly 3% inflation yielding a real policy rate of only about 0.5% to 0.75%, this model suggests the Fed's policy is already somewhat accommodative. This stands in stark contrast to the view held by most FOMC officials, who, based on the long-run neutral rate, see policy as tight or close to neutral. The author himself, however, emphasizes the high degree of uncertainty surrounding these estimates.
Viewed in isolation, this research from a regional Fed bank leans hawkish—if policy is already below neutral, there is theoretically a case for further rate hikes to push real rates back to neutral. But it is a research framework, not an official signal from the San Francisco Fed or the FOMC. A more definitive shift is visible in market rate expectations, where a chain of retail, employment, and CPI/PPI data is building a case that increasingly undermines the hawkish argument.
July CPI rose only 0.1% month-over-month, with core CPI up 0.2%, bringing core inflation down to 2.5% year-over-year. This was followed by a flat PPI reading, well below the market's expected +0.2%, with the year-over-year figure falling from 5.5% to 4.7%. Combined with a surprise drop of 23,000 jobs in July's nonfarm payrolls, the rationale for immediate renewed tightening has weakened considerably.
The market is essentially choosing to trust the economic data over this model. Following cooling employment, CPI/PPI, and retail sales data through July, interest rate futures pricing as of August 18 shows the probability of a September rate hike has fallen to about 35%, down from 52.2% a week earlier. Markets are now pricing in roughly a 65% chance that the Fed holds steady in September. Federal funds futures only price in about 21 basis points of hikes through year-end—less than a full single 25bp increase. This marks a significant pullback from late-July fears of consecutive hikes starting in September, replaced by expectations that September will likely bring no change, with a tail risk of one hike by year-end.
A recent Reuters survey of economists from August 12-17 was even more dovish, with a majority of respondents expecting the 3.50%–3.75% range to hold through the end of 2026. The latest retail data also strengthens the case for Goldman Sachs senior economist Matheus Dibo's prediction that the Fed will stay put all year. The key question is not whether inflation has returned to 2%, but whether supply shocks like oil prices and tariffs have triggered genuine second-round effects. Dibo argues that housing inflation has room to fall further, the labor market is not overheated, and no wage-price spiral has formed—giving the Fed time to wait for more data. The latest CPI/PPI figures reinforce this view.
This is not an isolated contrarian view. A Bloomberg Intelligence survey of economists found a median prediction that the Fed will keep rates unchanged for the remainder of 2026. In contrast, hawkish FOMC voters Hammack, Kashkari, and Logan, who voted for a 25bp hike in a 9-3 vote at the July meeting, still believe policy is not restrictive enough and argue for action now.
Goldman Sachs chief economist Jan Hatzius's latest forecast suggests a September hike is highly unlikely unless economic data due before the meeting takes a dramatic turn for the worse. His team wrote in a recent note that market bets on Fed hikes remain too aggressive given cooling inflation in the world's largest economy, citing weak retail sales, disappointing employment data, and slowing inflation as reasons why a September move is very unlikely.
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