Working Papers

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The Fed’s Policy Rules and the Neutral Real Interest Rate

Abstract

The decline in the neutral real interest rate (r) consistent with the Federal Reserve’s maximum employment and longer-run inflation objectives over the past 30 years has had profound implications for monetary policymaking and monetary policy evaluation. While various measures of r were presented to the Federal Open Market Committee (FOMC) between 2001 and 2012 and policy rules have been presented to the FOMC between 2004 and (at least) 2016 and have been included in the Monetary Policy Report since 2017, neither of the neutral real rates in the policy rules is consistent with the Fed’s definition. We construct a measure of r*, which we call the single-equation measure, that is based on one of the measures presented to the FOMC and is consistent with the Fed’s definition. Using Taylor and balanced approach rules, our single-equation measure produces federal funds rate (FFR) prescriptions that provide a closer fit to the FFR than the measures used in the Fed’s policy rules.

You can download the paper here: Neutral Real Rate