A senior U.S. Federal Reserve official said on Monday that interest rates are approaching neutral, but the concept of neutral rate can be less useful after the economic conditions become more normal.
During the panel themed on U.S. economy and monetary policy at New York-based Council of Foreign Relations, Federal Reserve Vice Chairman for Supervision Randal Quarles explained Chairman Jerome Powell' s latest comments on interest rates.
Fed officials estimate the neutral rate of interest is from 2.5 to 3.5 percent, according to Quarles. "Jay (Powell) had said quite accurately that we are approaching that range," he said.
Asked if Powell meant rate hikes would end sooner rather than later, Quarles said it was not clear about exactly how much further interest rates would rise.
"Where we will end up in that range will depend on the data we receive and our assessment of the performance of the economy over the course of next year," he noted.
Neutral interest rate, a notion that is driving the Federal Reserve' s attitude towards the normalization of U.S. monetary policy, means a level neither stimulative nor restrictive to the economy.
"I think that it can be a useful concept in helping guide monetary policy, but it's not terribly precise," Quarles said.
It may be changing over time, and "its utility as the central organizing thought around how you are conducting monetary policy becomes less."
"Because we are nearing other time where and we're moving back into a normalize monetary policy, that what's really important is that the Fed Reserve have a clearly communicated strategy, about monetary policy and that we execute on that strategy in a way that's predictable and transparent," said the Fed official.
The remarks came after Jerome Powell, chairman of the Fed, said last Wednesday that interest rates are "just below" the broad range of estimates of the level that would be neutral for the economy.
Market participants interpreted that as a dovish signal for future rate hikes, compared with his previous remarks in early October that rates were "a long way" from neutral.
Fed raised its benchmark interest rate for the third time this year on September 26 and made the target range between 2 percent and 2.25 percent. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020.