Trump has targeted U.S. growth of 3% or more, a goal met last year because of fiscal stimulus including a $1.5 trillion tax overhaul. Kevin Hassett, outgoing chairman of Trump’s council of economic advisers, reiterated earlier this month he still expects 3% growth this year. “I’m not trimming it back,” he said June 3.

Forecast Shift

Fed officials didn’t explain their reasoning in changing the forecasts in the Summary of Economic Projections. While some including Powell have said they hope tax and fiscal policies will boost productivity, their lowering of the neutral rate is a concession they are not expecting that to be sustained. They estimate long-term growth at 1.8% to 2%.

“There was never going to be a big pickup in growth,” said Brad DeLong, an economist at University of California at Berkeley, who worked in the Treasury Department in the 1990s with Lawrence Summers, and like Summers has cautioned growth is in a period of “secular stagnation.” DeLong cites low inflation, high savings and risk aversion by borrowers. “It is not a surprise.”

Estimates of neutral -- sometimes called R-star -- have helped to guide Fed policy for years as a loose benchmark that didn’t get too much attention. Powell raised interest in the theoretical rate last October when he allowed that rates were “a long way from neutral,” implying many hikes to get there. He backtracked a month later by saying rates were just below a range of estimates of neutral.

The Fed’s target rate has never peaked at such a low level, rising to more than 5% before the last two recessions. Rates averaged 4.8% in the 20 years ended in 2007.

“Low neutral interest rates are very real, and they’re here to stay,” New York Fed President John Williams, a leading researcher of the neutral rate, said in a speech in June. He cited low productivity, slower population growth and a decline in demand for savings.

Williams and two Fed colleagues, Kathryn Holston and Thomas Laubach, have used economic data in a model estimating neutral, at 0.42% as of the first quarter, implying a rate of about 2% or so, when inflation is included. That compares to rates of more than 5% in in the 1960s and 3.5% as recently as the late 1990s.

While estimates of long-term productivity have been unreliable, and some economists point to artificial intelligence and machine learning as potentially raising the level in the future, an aging population makes it unlikely there will be a big pickup in labor force growth. The national median age rose to 38.2 years last year, according to newly released data from the U.S. Census Bureau, while the number of births fell to the lowest level in 32 years.

Carl Riccadonna, chief U.S. economist at Bloomberg Economics, said the lower neutral rate is “inextricably linked” to declines in estimates of full employment as the U.S. labor market continues to tighten without appearing to spark much inflation.