Listen and subscribe to Stocks in Translation on Apple Podcasts, Spotifyor wherever you find your favorite podcasts.

Stocks have surged since the election, while bonds are locked in a tug-of-war between bulls and bears, as participants in both markets try to guess how the U.S. economy will fare under the new Trump administration.

At the heart of the problem is a highly controversial issue that concerns economists at the Fed and Wall Street alike. Something which, like mythical yetino one has ever seen it but everyone agrees: it exists: the neutral rate.

Kathy Jones, chief fixed income strategist at Schwab, recently joined Yahoo Finance’s Stocks in Translation group podcast and described the neutral rate as “the Sasquatch of the financial world.”

The neutral rate is quite simple to define. It is the interest rate that neither stimulates nor slows the economy. This is the sweet spot where growth and inflation balance. Too low, and the economy could overheat; too high and growth stagnates.

The problem is that no one really knows. precisely what interest rate level meets this high standard.

“You model his entries by looking at the past,” Jones said. “Things like productivity could come into play.” She noted that if workers could increase their productivity and output, the economy could grow – and crucially, without inflation.

Minneapolis Fed Chairman Neel Kashkari recently echoed this idea. at Yahoo Finance Invest 2024 Eventexplaining: “In an environment of higher productivity, the neutral rate should be higher. » He said that if productivity is structurally higher, the Fed will have less room to cut until the economy returns to neutrality.

Still, this nebulous rate is key to shaping Federal Reserve policy.

At Invest, Kashkari echoed Fed Chairman Jerome Powell’s comments at the September meeting. FOMC Presser“The neutral rate is not directly observable. We know it by its effect on the economy.”

With the Fed currently in the process of lowering rates, a higher neutral rate implies that the Fed does not need to cut rates as much to support the economy. Alternatively, a lower neutral rate would argue for more aggressive cuts.

Lately, investors have started to embrace the idea of ​​a higher neutral rate.

When the Fed began its rate-cutting cycle in September, investors expected it to cut short-term rates to 2.8% – or within a range of 2.75% to 3% – d by the end of 2025. Six weeks later, the bond market is down. now the price in four less rate cuts – bringing next year’s projected rate to a range of 3.75% to 4%.

Fortunately, Jay Powell and the Fed currently appear to have some room to maneuver.

In a speech delivered Wednesday at Dallas Regional ChamberPowell said: “The economy is not sending any signals that we need to hurry to lower rates.”

For his part, Jones prefers to look at real data rather than modeling it with theoretical projections.

“We see what we observe in the actual data,” Jones said, “and we go from there.”

On the Yahoo Finance podcast Actions in translationYahoo Finance editor Jared Blikre and producer Sydnee Fried cut through market chaos, noisy numbers and hyperbole to bring you essential conversations and insights from across the entire investing landscape. Find more episodes on our video center or watch on your favorite streaming service.

Click here for the latest stock news and in-depth analysis, including the events that move stocks.

Read the latest financial and business news from Yahoo Finance