Neutral rate (r-star).

In plain English

The neutral rate, written r-star, cannot be observed directly, so economists estimate it from models, and the estimates move over time and disagree with each other. It is defined in real terms, meaning after inflation, so comparing it with a policy rate requires adjusting for expected inflation first. Slow-moving forces drive it, including productivity growth, demographics, and the global appetite for safe assets. Policy is called restrictive when the real policy rate sits above r-star and accommodative when it sits below. Because the estimate carries a wide error band, officials treat it as a rough compass rather than a target.

01Why it matters

Whether rates feel high or low depends on this benchmark, not on the headline number, so a 4 percent policy rate can be tight in one decade and loose in another.

02The math, step by step

Say r-star is estimated at 0.5 percent and expected inflation is 2 percent. The neutral nominal rate is about 2.5 percent. A policy rate of 5 percent is then roughly 2.5 percentage points restrictive, which is a very different message than the number 5 alone.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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