The Federal Reserve is expected to cut interest rates both in the upcoming meeting and in 2025. The current neutral rate, calculated by the New York Fed, stands at 0.8%, while the inflation-adjusted federal funds rate is 1.9%. This suggests that short-term rates are significantly above average levels.
Historically, the one-year real interest rate in the U.S. has been below the neutral rate, averaging 1.4% lower since 2003. Some researchers, like MIT's Ricardo Caballero, argue that the neutral rate might be lower than anticipated due to unprecedented sovereign debt levels and the need to encourage private sector lending to governments.
Caballero also suggests that the risk premium will rise, requiring lower rates to attract investment, as the S&P 500's earnings yield is currently below the ten-year Treasury yield.
