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What Is a Normal Fed Funds Rate?

June 1, 2026 | Commentary

  • All eyes are on the newly appointed Federal Reserve Chair, Kevin Warsh. As inflation persists well above the Fed's target of 2%, the markets are questioning whether the Fed will resume its lowering of the Fed Funds rate that has been "stop and go" since 2024 or be forced to increase rates.
  • The first quarter of the 21st century has seen all manner of economic conditions. Severe recessions caused by the correction of financial excesses and pandemic induced economic disruptions have led the Fed to largely be reactive and, in retrospect, often faulty in its rate setting decisions.
  • Near-zero interest rates are not required for the U.S. economy to move forward. Rational capital market allocations are more likely to be made when real rates of interest are positive, reducing excesses in the market and generally promoting more sustainable, steady growth.
  • The Fed's mandate is to promote a full employment economy with modest inflation. The best chance for this will likely come with a return to normal Fed Funds rates, applied consistently with a longer-term perspective. Success in achieving this goal will define Mr. Warsh's legacy as Chair.

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