The neutral rate of interest, often written as r star (r*), is a research estimate of the real short term interest rate that would prevail when the economy is at full strength and inflation is stable. The Federal Reserve Bank of New York states that definition for its Laubach Williams and Holston Laubach Williams models. You cannot read r star off a bond ticker. It is inferred from macro data with a model, and every estimate comes with uncertainty and later revisions.

This page is for AP Macro and intro economics study. It is educational only and is not investment, financial, tax, or legal advice.

Why economists care about a rate you cannot see

Policy makers and textbooks often compare the real policy rate with a rough neutral benchmark. If the real policy rate sits well above that benchmark, the stance is often described as restrictive. If it sits well below, the stance is often described as accommodative. Those labels are judgments, not mechanical laws. They depend on which r star estimate you trust, which inflation measure you use to turn a nominal rate into a real rate, and how much slack you see in the real economy.

For the gap between nominal and real rates, see real interest rates explained. For the classroom rule that starts from a neutral real rate, see the Taylor rule and the Taylor rule calculator.

How the New York Fed defines and publishes r star

On its Measuring the Natural Rate of Interest page, the New York Fed explains that the Laubach Williams (LW) and Holston Laubach Williams (HLW) models estimate r star and related variables. Their approach defines r star as the real short term interest rate expected to prevail when an economy is at full strength and inflation is stable. The same page states that the LW and HLW estimates are not official forecasts of the Federal Reserve Bank of New York, its president, the Federal Reserve System, or the Federal Open Market Committee.

As of the August 2026 update on that site:

  • The LW current estimates spreadsheet reports estimates based on data available on 26 August 2026, with a final data point of 2026 Q2. The two sided US r star estimate for 2026 Q2 is about 1.65 percent.
  • The HLW current estimates spreadsheet also ends at 2026 Q2 (one sided estimates). The US natural rate (r*) for 2026 Q2 is about 1.01 percent.

Those two model families disagree by more than half a percentage point at the same quarter. That spread is a feature of the concept, not a bug in one spreadsheet. Always name the model, the quarter, and the as of date when you quote a figure.

Classroom link to the Taylor rule and the output gap

Many textbook Taylor rules begin from a neutral nominal rate built from an equilibrium real rate plus inflation (or an inflation target), then add responses to an inflation gap and an output gap. A higher assumed r star raises the whole suggested policy path. The output gap itself is also an estimate. See the output gap explainer and the monetary and fiscal topic hub.

AP Macro tip: on free response questions, say that r star is unobserved, name it as a real rate concept tied to full employment and stable inflation in the model you are using, and do not invent a single official Fed number. If a prompt gives you an r star assumption, use that assumption and show the arithmetic.

Related reading

Sources

Frequently asked questions

What is r star in plain English?

R star (also called the neutral or natural rate of interest) is a model based estimate of the real short term interest rate that would prevail when the economy is at full strength and inflation is stable. It is not a rate you can look up on a market screen.

Is r star the same as the federal funds rate?

No. The federal funds rate is a nominal overnight policy rate the Federal Reserve sets in a target range. R star is a real rate concept used to judge whether a given real policy stance is roughly stimulative or restrictive relative to a full strength, stable inflation benchmark.

Why do different models give different r star numbers?

R star is unobserved. Each model uses different equations, filters, and data choices, so point estimates disagree and are revised when new data arrive. Treat any single number as an estimate with wide uncertainty, not a precise policy target.

How does r star show up in the Taylor rule?

Many classroom Taylor rules start from a neutral nominal rate built from an equilibrium real rate (r star) plus inflation or an inflation target, then adjust for inflation and output gaps. A higher assumed r star lifts the whole suggested path. See the Taylor rule explainer and calculator on this site.