How Central Banks Estimate the Neutral Rate of Interest

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Jul 27, 2026 · 7m · transcript

In late 2025, the New York Fed's estimate of R-star—the neutral rate of interest—fell to 0.75 percent, the lowest since the pandemic. But what is R-star, and why does it matter? In this episode, Lucas and Luna unpack the theory behind this unobservable variable, from the Laubach-Williams model to the ongoing debate over whether rates are actually as restrictive as they seem. They explore how central banks use the neutral rate in the Taylor rule, why estimates vary so widely, and what a persistently low R-star means for monetary policy going forward. With specific references to Fed dot…