The natural rate of interest is the real federal funds target rate that would be neither expansionary nor contractionary if the economy were operating near its potential. A model estimate of the natural rate—developed by Thomas Laubach and John Williams, currently President of the San Francisco Fed—has fallen sharply since the crisis and stands only slightly above zero. A lower natural rate implies less need for policy to tighten and a greater likelihood that policy measures now considered unconventional will be employed in future cycles.
Source: Guggenheim Investments, Federal Reserve Board, Bureau of Economic Analysis, National Bureau of Economic Research, Haver Analytics. *Shaded area indicates recession. As of 8.24.16.
Scott Minerd is chairman of investments and global chief investment officer at Guggenheim Partners.
A New Policy Orthodoxy Is Emerging
August 25, 2016
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