Two weeks ago, when deciphering the FOMC’s latest minutes, the market surged after paying particularly close attention to an extended Fed discussion of a heretofore little known aspect of the Fed’s monetary policy decision making, namely its focus on r*, or the “equilibrium” growth rate.

As Goldman then summarized, “minutes from the October 27-28 FOMC meeting indicated that most FOMC participants thought that the conditions for liftoff “could well be met by the time of the next meeting.” The minutes also noted staff estimates that the short-run equilibrium real interest rate is currently around zero and the long-run equilibrium rate would likely remain lower than was the case in previous decades.”

For those unfamiliar, the equilibrium growth rate is roughly coincident with the Fed’s long-term inflation goal which over the past several decades has been around 2%. However, as a result of secular stagnation even the Fed has been forced to admit that not only is US potential growth lower, but so is r*, or the equilibrium growth rate.

This is what Deutsche Bank said recently, when explaining the Fed’s rush to hike rates:

The logic for reducing accommodation is embedded in a cyclical view of the economy that defines a real rate equilibrium in the short term with a long rate equilibrium anchor based on price stability defined around 2 percent. There is a presumption that inflation is naturally pulled towards a 2 percent “long run” equilibrium as long as the economy grows above potential. And there is a presumption that if the actual real rate is below the short-run equilibrium rate, then growth will be above potential. The fundamental question is whether the underlying inflation equilibrium is actually 2 percent or lower. If for example we have been growing above potential for a while, then maybe inflation is also exaggerated higher now.

The reason why the Fed’s latest Minutes resulted in a jump in the market is because if indeed r* is around zero or well below 2%, then the Fed’s rate hiking cycle will be very quick before the Fed is forced to abort it and resume easing: perhaps as low as 3 rate hikes tops before r* is hit and the economy can not sustain any more tightening.