Summary of The Equilibrium Real Funds Rate

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The Federal Reserve has kept an extraordinarily accommodative interest rate policy since the Great Recession, with the benchmark federal funds rate holding close to zero. Only in December 2015 did the Fed raise the rate, but only by 0.25%. Determining the equilibrium fed funds rate going forward is a complex undertaking, considering the rate’s relationship to the proper balance between full employment and price stability. Is a low real fed funds rate on the horizon for the foreseeable future, and if so, is this the “new neutral,” just as slower economic growth is the new normal? getAbstract recommends this highly sophisticated academic report to astute readers interested in a deep-dive analysis of equilibrium interest rates.

In this summary, you will learn

  • What the future expectations are for the real federal funds rate,
  • What relationship exists between the fed funds rate and GDP trend growth, and
  • How the Federal Reserve might consider its strategy of real rate normalization.
 

About the Authors

James D. Hamilton is an econometrician at the University of California at San Diego. Jan Hatzius is chief economist at Goldman Sachs. Ethan S. Harris heads North America economics at Bank of America Merrill Lynch. Kenneth D. West is an economics professor at the University of Wisconsin.

 

Summary

Federal Reserve policy makers are facing the difficult task of determining what the equilibrium real federal funds rate – “a rate that is consistent, on average, with output at potential and stable inflation” – should be. After a near-zero fed funds rate since 2008, the outlook is uncertain as to if...

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