Early Monday, while documenting Goldman’s call for the commencement of Fed cuts from Q2 2024, I said the bank touched on several key policy debates in the course of sketching the contours for a prospective easing cycle.

One of those debates is the neutral rate discussion. Goldman expects the Fed to stop cutting when the funds rate is 3-3.25%, which the bank’s David Mericle noted is “above the FOMC’s 2.5% median longer run dot.”

That’s important. I’ve repeatedly pointed to the distinct possibility that that dot (the long run dot) will eventually shift up if macro- and socio- economic conditions continue to evolve consistent with the post-pandemic experience.

Goldman addressed that. “We have long been skeptical that neutral was as low as widely thought last cycle, and larger fiscal deficits have arguably pushed it higher since,” Mericle remarked, adding that investors apparently agree, given that market-based proxies for the neutral rate “have risen meaningfully since last cycle.”

The figure above illustrates the point. It shows you a market-based proxy as well as the New York Fed’s short-run r-star estimate, juxtaposed with the widely-cited Holston-Laubach-Williams model and the long run dot as it stood in the June SEP.

More than a couple of long run dots have already shifted up, and as Mericle went on to write, “there is plenty of time for the FOMC to revise its estimate if the economy remains resilient with the funds rate at a much higher level.”

And then there’s the Liberty Street post published last week which argued that the short-run neutral rate has “increased notably over the past year, to some extent outpacing the large increase in the policy rate.” If that’s true, it’s small wonder that aggressive Fed tightening has yet to slam the brakes on the economy.

As the New York Fed researchers put it, “One implication is that the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively buoyant so far despite the elevated level of interest rates.”

Goldman suggested the FOMC might eventually “adopt [that] view.”

However the Committee may choose to rationalize things, the bottom line is that absent a serious recession, rate cuts could end with Fed funds meaningfully higher than the current long run dot — technically “restrictive,” assuming that dot doesn’t move. Whether and how long officials stick to the view that the long-term neutral rate either hasn’t changed or is actually lower post-pandemic is an open question.