Decoding the R* (R-Star) Mystery
The market recognizes that the indication by the FOMC at the end of last year that four rates hikes in 2016 may be appropriate was far from the mark. At the same time, investors are coming around to the prospects that the Fed is not one and done either.
A key issue for investors and policymakers is the terminal rate for Fed funds. This terminal rate is what economists call the natural or neutral interest rate. It is the rate that is consistent with full employment, capacity utilization and stable prices.