Hamak on Why the Neutral Interest Rate May Be Underestimated

Federal Reserve official Hamak recently presented a nuanced view on monetary policy, suggesting that prevailing assumptions about the neutral interest rate may significantly understate the true equilibrium level. Her perspective, while focused on the technical components of inflation measurement, reveals deeper convictions about the economy’s underlying growth potential and the appropriate policy stance going forward.

November Inflation Data Obscured by Technical Factors

The November Consumer Price Index showed a year-on-year increase of 2.7%, appearing to indicate progress on inflation management. However, Hamak points to a critical distortion: the October government shutdown and measurement challenges in early November created anomalies in data collection that understated the true price trajectory. When statisticians at the Bureau of Labor Statistics adjusted for these measurement difficulties, the comparable inflation rate moved closer to 2.9% or 3.0%—levels that forecasters had more commonly anticipated. This adjustment matters significantly, as it suggests the disinflationary progress reported in headlines may overstate actual momentum.

The Neutral Interest Rate Question

Beyond the inflation measurement issue, Hamak’s primary concern centers on the neutral interest rate—the theoretical rate at which monetary policy neither stimulates nor constrains economic activity. While this rate cannot be directly observed, it can be inferred from the economy’s actual performance. Hamak argues that market participants and policymakers have been operating with estimates that are too low, potentially leading to overly accommodative policy settings. If the true neutral rate is indeed higher than consensus estimates, current interest rate levels may be providing more stimulus than commonly acknowledged.

Economic Momentum Supporting Growth Outlook

Hamak’s analysis reflects confidence in the economy’s intrinsic growth capacity. She contends that the U.S. economy possesses sufficient momentum to maintain robust expansion in the coming year, independent of monetary policy support. This perspective suggests she sees less urgency for rapid rate cuts and supports a more cautious approach to easing. The combination of understated inflation data and stronger underlying economic dynamism creates a case for maintaining or extending the current policy stance rather than accelerating the pace of reductions.