Federal Reserve’s Interest Rates Still 50–100 Basis Points Above Neutral — Waller Says Room to Cut

Federal Reserve Governor Christopher Waller confirmed today that the U.S. central bank’s policy interest rates remain significantly above the “neutral” level — the rate that neither stimulates nor restrains the economy. Waller estimated that current rates sit roughly 50 to 100 basis points above neutral, signaling that monetary policy is still in restrictive territory.

Waller made the remarks at the Yale School of Management CEO Summit, stressing that because rates are above neutral, the Federal Reserve has the flexibility to cut rates further if inflation continues to ease and economic data supports such moves. However, he noted there’s no urgency to rush rate cuts, as policymakers seek to balance inflation, employment, and economic growth.

Why This Matters:

Monetary Policy Still Restrictive: Being 50–100 bps above neutral means the Fed’s stance is still slowing the economy rather than just “neutral,” even after recent cuts.

Room for Future Cuts: This restrictive position gives the Fed space to ease more if inflation declines as expected without overheating the economy.

Market Expectations: Investors had priced in potential rate reductions after three consecutive 25 bp cuts in 2025, with the federal funds rate now at 3.50 %–3.75 %.

Context: The neutral rate isn’t directly observable and varies by model, but economists often place it near the level where real interest rates align with the economy’s long-term growth and inflation goals. Current Fed policy still sits above that rough estimate, reflecting caution amid soft job market trends and slowing inflation.

In essence, the Fed is still on restrictive settings relative to neutral, giving it flexibility for future easing — but decisions will depend heavily on incoming data on inflation and labor market conditions.