Even the Fed’s own research shows rates are too high

first_img continue reading » New research from the Federal Reserve’s own economists reveal that estimates of the neutral real rate of interest are well below those of policy makers. The low estimates have important implications for policy makers and market participants, suggesting the Fed may still have some hawkish expectations of what can be accomplished in the future despite its dovish turn this year.The real neutral rate of interest is the rate that is consistent with a balanced economy in the long run. Policy makers use it as a gauge by which to judge the stance of monetary policy. For example, if policy rates are below the neutral rate, the Fed is being accommodative.Because the real neutral rate of interest can’t be seen directly, policy makers must use econometric estimates to guide them. The September – and most recent – Summary of Economic Projections of Fed meeting participants shows the median estimate of the longer run interest rate at 2.5%. However, the uncertainty of the estimates is wide, with the overall range at 2% to 3.3%. After accounting for the Fed’s 2% inflation target, this means that policy makers estimate the real neutral rate is 0.5%, ranging from 0% to 1.3%. ShareShareSharePrintMailGooglePinterestDiggRedditStumbleuponDeliciousBufferTumblrlast_img

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