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FED NEUTRAL STANCE POINTS TO OVER 4% - DEUSTCHE BANK

The U.S. neutral rate or R-star is back in focus as a longer-lasting energy shock and a resilient economy raise questions about whether it may be higher than previously assumed.

The neutral rate is generally understood to reflect the level and which rates neither stimulate nor restrains economic activity, making it an important medium-term reference point when thinking about where policy rates may eventually settle.

"Even with R-star of about 1.25%, below our estimate of about 1.6%, a nominal policy rate of over 4% would be needed to achieve a neutral stance today," Deutsche Bank analysts say, recalling that inflation is trending closer to 3%.

The Federal Reserve's key rate is at 3.50-3.75% and markets price in about a 50% chance of a hike this year.

Deutsche Bank also recalls that weeks ago, St Louis Fed President Musalem stated that current policy is either neutral or slightly accommodative in real terms.

"We appreciate the need to manage these risks, and the logic of looking through supply shock-driven inflation, but a concern is that a string of shocks have left real rates too low to return inflation to 2%," Deutsche analysts said in the note.

Deutsche Bank assumes that the current level of rates are not enough to bring inflation to the 2% target.

A growing number of U.S. policymakers are open to the possibility that they may need to raise rates, minutes of the Fed's April meeting released on Wednesday showed.

(Stefano Rebaudo)

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