Liberty Street Economics

« Just Released: Five New Data Series on Consumer Expectations | Main | The “Cadillac Tax”: Driving Firms to Change Their Plans? »

February 26, 2016

From the Vault: The Path of Interest Rates

LSE_2016_vault-interest-rates_snider_art In recent speeches, the Federal Reserve’s Janet Yellen and Lael Brainerd explained how policymakers are likely to take a cautious approach to normalizing monetary policy given historically low estimates for the natural rate of interest and expectations that the rate will rise only gradually over time.

For background on the concepts they discuss, readers may want to check out numerous posts in the Liberty Street Economics archive covering the measurement and dynamics of the natural rate of interest as well as its use as a benchmark for calibrating monetary policy settings.

While the natural rate is unobservable, it is estimated using a variety of statistical and model-based approaches as the rate that both allows the economy to expand in line with its underlying potential and keeps inflation stable. As our bloggers explain, monetary policy can be seen as easy if the policy rate is below the natural rate, with the gap between the rates measuring the extent of the policy stimulus.

In a May 2015 post, Marco Del Negro and coauthors described how the New York Fed uses a dynamic stochastic general equilibrium (DSGE) model to calculate this hypothetical rate. The Bank’s estimates tracked the natural rate from above 6 percent in 2007 to -2 percent in mid-2009 to just above zero in May 2015. The authors also explained how the model helps to gauge the impact of shocks on the natural rate, both in history and in forecasts, as they answer the question “why are interest rates so low?”

In another post, Bianca De Paoli and Pawel Zabczyk delve into how factors related to risk and uncertainty might depress the natural interest rate. Those are dimensions that standard models leave out, and whose omission might lead to a policy rate that undershoots or overshoots its appropriate level, they said.

We use the blog periodically to present the updated economic forecast implied by the New York Fed’s DSGE model. See our latest estimate of the nominal natural rate of interest charted against the path of the nominal federal funds rate in a December post. The model continues to project a gradual increase in the natural rate as economic “headwinds” brought about during the financial crisis abate.

Stepping back, our bloggers have also explained how we share analysis such as the staff’s view of the level of the equilibrium rate and its anticipated dynamics with the Bank’s president in preparation for Federal Open Market Committee meetings.

Selected Posts
Why Are Interest Rates So Low?
Marco Del Negro, Marc Giannoni, Matthew Cocci, Sara Shahanaghi, and Micah Smith
Risk Aversion and the Natural Interest Rate
Bianca De Paoli and Pawel Zabczyk
The FRBNY DSGE Model Forecast—November 2015
Marco Del Negro, Marc Giannoni, Erica Moszkowski, Sara Shahanaghi, and Micah Smith
The Monetary Policy Advice Process at the New York Fed
Jamie McAndrews, Jonathan McCarthy, Paolo Pesenti, Argia Sbordone, and Andrea Tambalotti

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Anna Snider is a cross-media editor in the Federal Reserve Bank of New York’s Research and Statistics Group.
Posted by Blog Author at 07:00:00 AM in Monetary Policy

Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.

About the Blog
Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

Economic Research Tracker

Liberty Street Economics is now available on the iPhone® and iPad® and can be customized by economic research topic or economist.

Most Viewed

Last 12 Months
LSE in the News

Access to linked content may require a subscription.

Useful Links
Feedback & Comment Guidelines
Liberty Street Economics invites you to comment on a post.
Comment Guidelines
We encourage you to submit comments, queries and suggestions on our blog entries. We will post them below the entry, subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted more than 1 week after the blog entry appears will not be posted.
Please try to submit before COB on Friday: Comments submitted after that will not be posted until Monday morning.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. The moderator will not post comments that are abusive, harassing, or threatening; obscene or vulgar; or commercial in nature; as well as comments that constitute a personal attack.  We reserve the right not to post a comment; no notice will be given regarding whether a submission will or will not be posted.
Disclosure Policy
The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.