U.S. Medium-Term Real Natural Interest Rate at 1.5%, Analysis of Accommodative Monetary Policy
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The medium-term real natural interest rate in the U.S. is estimated to be around 1.5%, indicating that the current policy interest rate is below neutral levels. The San Francisco Federal Reserve Bank stated in a report released on the 18th that the real federal funds rate, when adjusted for inflation, is lower than the natural interest rate, suggesting that the current monetary policy is accommodative. The natural interest rate is the real short-term interest rate that holds when the economy is close to full employment; if the real interest rate is higher than the natural rate, it is interpreted as tight, while if it is lower, it is seen as accommodative. This analysis focuses on the 'medium-term' natural interest rate and explains that it can complement the limitations of short-term and long-term estimates. Currently, the medium-term real natural interest rate is about 1.5%, with the federal funds rate target range at 3.5% to 3.75%, and if inflation is around 3%, the real federal funds rate is calculated to be approximately 0.5% to 0.75%. This figure is lower than the natural interest rate, suggesting that the monetary policy is accommodative. The report explains that considering the medium-term natural interest rate can reduce the likelihood of the monetary policy deviating from inflation and employment targets. However, the volatility of short-term estimates and measurement errors still remain a burden for policy judgment.
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