The Federal Reserve is considering whether its current policy setting is restrictive enough to slow down economic activity. They are evaluating if they need to raise interest rates further, as the housing sector, which has traditionally been an important transmission mechanism for monetary policy, might not be as responsive to higher rates as before. Fed officials use a benchmark rate called the ’neutral’ rate, which neither stimulates nor restrains growth, to gauge whether their policy is too tight or too loose. A rate above neutral restricts activity and lowers inflation, while a rate below neutral provides stimulus.
