The Fed’s Rate Hike Milestone That Never Was

Let’s talk about milestones—those shiny, round-number achievements that make policymakers and economists feel like they’ve cracked the code. The Federal Reserve, in its infinite wisdom, has been chasing one such milestone for years: the elusive “neutral interest rate.” This is the mythical rate where monetary policy is neither stimulative nor restrictive, the Goldilocks zone of macroeconomics. But here’s the thing—it’s a milestone that never was. The Fed’s obsession with this concept has led to a series of missteps, and the latest rate hikes are just the latest example of how this phantom benchmark is wrecking the economy.

The Myth of the Neutral Rate

The neutral interest rate is supposed to be the sweet spot where the economy hums along at full employment without overheating. In theory, it’s the rate that balances savings and investment, keeping inflation in check while avoiding a recession. The problem? Nobody knows what it actually is. The Fed has been guessing, and its guesses have been wrong—repeatedly.

Economists used to think the neutral rate was around 5% in the pre-2008 world. Then the financial crisis hit, and the Fed slashed rates to near zero. When the economy recovered, the Fed assumed the neutral rate would bounce back. It didn’t. Now, after years of ultra-low rates, the Fed is still trying to figure out where this magical number lives. The latest estimates? Somewhere between 2% and 3%. But by the time they figure it out, the economy might already be in the ditch.

The Rate Hike Rollercoaster

The Fed’s latest rate hikes are a perfect example of this guessing game gone wrong. In 2018, the Fed raised rates four times, convinced it was normalizing policy. Then the markets tanked, and the Fed had to reverse course. In 2022, it hiked rates aggressively to fight inflation, only to realize it might have gone too far. Now, it’s stuck in a cycle of “hike, pause, hike, pause,” like a bad video game boss fight.

The Fed keeps saying it’s data-dependent, but the truth is, it’s flying blind. The neutral rate is a moving target, and the Fed’s attempts to hit it are like trying to shoot a bullet with another bullet. Every time it raises rates, it risks tipping the economy into recession. Every time it cuts, it risks reigniting inflation. The milestone the Fed is chasing doesn’t exist—it’s a mirage, and the longer it chases it, the more damage it does.

The Real-World Consequences

The Fed’s rate hikes aren’t just abstract economic theory—they have real-world consequences. Homebuyers are getting crushed by mortgage rates that have doubled in two years. Small businesses are struggling with higher borrowing costs. And savers? They’re finally getting a decent return on their deposits, but at what cost?

The Fed’s obsession with the neutral rate has turned monetary policy into a game of whack-a-mole. It raises rates to cool inflation, then cuts them to avoid a recession, then raises them again because inflation didn’t disappear. The result? A economy that’s constantly lurching from one extreme to the other.

The Bottom Line

The Fed’s pursuit of the neutral rate is a milestone that never was. It’s a concept that sounds good in theory but falls apart in practice. The Fed needs to stop chasing phantom benchmarks and start focusing on what’s actually happening in the economy. The neutral rate isn’t a fixed point—it’s a moving target, and the Fed’s attempts to hit it are doing more harm than good.

The economy doesn’t need a perfect rate. It needs a Fed that’s willing to admit it doesn’t have all the answers. Until then, the milestone the Fed is chasing will remain just out of reach—a mirage in the desert of monetary policy.