A low US neutral policy rate with a 1% handle

What was once considered a floor, may now represent a ceiling for the US nominal neutral policy rate. We estimate cyclical and secular factors have constrained it to 0.5% in the wake of the Covid crisis. In the long run, structural factors will likely keep the nominal neutral rate centered around 1.85%.

What you will learn:

  • How lower potential output growth, slower inflation, and steady downward pressure from other key factors, including global savings, elevated demand for safe assets, and the fall in the relative price of investment goods, have pushed the neutral rate toward 0% over the past 40 years.
  • The ways in which this stance should provide increasing policy accommodation as the neutral rate slowly rises in the coming months.
  • How our upside scenario could see stronger potential output growth providing the Fed with additional policy space. But with risks tilted to the downside, we shouldn’t overlook the odds of another cyclical downturn with lingering scarring effects.

Topics: Inflation, Federal Reserve, Coronavirus, US economy, employment

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