Cadence Research · Reviewed 2026-07-30
What is the neutral interest rate?
The neutral interest rate is an estimated level of interest rates that would neither stimulate nor slow the economy when inflation is at target and the economy is operating normally. It is often called r-star. Because it cannot be observed directly, policymakers estimate it with considerable uncertainty and do not treat it as a precise near-term target.
Why it matters
Neutral-rate estimates help explain whether policymakers view current policy as restrictive or supportive. They are one input into the debate, not a substitute for current data.
How it appears in official communication
Officials may discuss longer-run rate estimates, uncertainty around them, or whether the economy appears sensitive to current borrowing costs.
A common misunderstanding
The neutral rate is not the same as the current policy rate, and it does not tell policymakers exactly where rates should be at the next meeting.
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Related guides
Primary sources
- Monetary Policy: What are its goals? (Federal Reserve)
- Monetary policy (European Central Bank)
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