Federal Reserve Bank of Cleveland model estimates medium-run nominal neutral interest rate at 3.7% and flags a restrictive policy stance with 77% probability

The Federal Reserve Bank of Cleveland published an Economic Commentary presenting a newly developed model that estimates the medium-run nominal neutral interest rate at 3.7%, using data through the second quarter of 2025. With the nominal federal funds rate in a range of 4.25% to 4.5%, the model places the monetary policy stance in restrictive territory with 77% probability. The commentary, by Saeed Zaman and Taylor Horn, frames the neutral interest rate as the level of the federal funds rate that neither restrains nor stimulates the economy and notes that it cannot be observed directly, making precise estimation difficult. The authors describe the “Zaman model” as using a richer structure than existing approaches and conditioning on more information, including survey data, and point readers to related work on a unified framework for estimating macroeconomic “stars.”