Federal Reserve officials emphasize that their decisions are closely tied to economic data and indicators of the economy's health and potential trajectory. A key guiding principle for the Fed is the concept of the 'neutral rate of interest,' which Chair Jerome Powell describes as theoretical and not directly observable.
The neutral rate of interest is the level of interest rates that neither stimulates nor dampens the economy. The Fed primarily uses its key interest rate to influence borrowing costs throughout the economy. This tool can either boost demand when rates are low or cool it down when rates are high, depending on whether the Fed is addressing high inflation or high unemployment.
