Editor’s note: We hope our readers enjoyed learning about the Federal Reserve and interest rates. We will now go one step further and explain another key concept related to the Fed. 

Economists lose sleep over it. Central bankers get asked if we’re close to it. Most Americans don’t realize it, but their lives are quietly guided by it. 

The it here is the neutral rate of interest, also known as r-star or r*. 

Think of the neutral rate as kind of like the Force from Disney’s Star Wars. Obi-Wan explains it best when he describes it to Luke Skywalker in Star Wars: Episode IV – A New Hope. “The Force is what gives a Jedi his power. It’s an energy field created by all living things. It surrounds us and penetrates us. It binds the galaxy together.” 

Much like the Force, the neutral rate powers, penetrates, and binds all aspects of the economy. And even if most don’t understand how the mysterious Force works, they get there is a light and a dark side, ability to influence others’ minds, and awareness over things you don’t know. But how it works, what drives it, and how to measure its strength remains vague, just like r-star. 

We will try to explain why this concept remains one of the strongest forces driving the economy.