At its latest meeting, the Fed held interest rates steady around 4.3%, pausing for the first time since September. Sticky inflation and a strong labor market has made it harder for the Fed to justify bringing down rates any lower. 

If current rates are higher than the neutral rate, it signals that we are in a contractionary environment—where economic growth will tend to slow, the unemployment rate would rise and rate of inflation would be muted or decline, according to an article published by the Federal Reserve Bank of Dallas. 

In comparison, if current rates are lower than the neutral rate, it signals that we are in an expansionary environment to encourage consumers to spend more. When this is the case, economic slack will tend to diminish—the economy will tend to grow faster, the unemployment rate should decline and inflation should rise, the article said.

Another way to think about the neutral rate is to think of it as the rate at which savings equals investments in the long run. 

If those two are not in equilibrium, consumers are enticed to save more if their money is earning more in savings and discouraged from investing when it becomes more expensive to do so. On the other hand, consumers would supply companies with capital for new investments if their savings aren’t earning enough. 

A balance would be struck when interest rates are high enough that savers can save and borrowers can borrow. That is where to land the economy.