It is far too early to judge the effects of the Brexit vote. As the global outlook evolves, it will be important to assess the implications for the U.S. economy, and for the stance of policy appropriate to foster continued progress toward our objectives of maximum employment and price stability.

I am often asked why rates remain so low now that we are near full employment. A big part of the answer is that, at least for the time being, the appropriate level of rates is simply lower than it was before the crisis. As a result, policy is not as stimulative as it might appear to be. Estimates of the real interest rate needed to keep the economy on an even keel if it were operating at 2 percent inflation and full employment--the "neutral rate" of interest--are currently around zero. Today, the real short term interest rate is about negative 1-1/4 percent, so policy is actually only moderately stimulative. I anticipate that the neutral rate will move up over time, as some of the headwinds that have weighed on economic growth ease.

My colleague John Williams, president of the San Francisco Fed, along with Thomas Laubach, on the staff of the Board of Governors, has done pioneering work on the neutral rate (r*) that argues the longer-run neutral real rate depends on the economy’s potential growth rate, which varies over time, as well as other unobserved factors. As of the first quarter of 2016, the Laubach–Williams model implied a 0.2 percent neutral real rate.

Evan Koenig and Alan Armen at the Dallas Fed use movements in slack to help identify the neutral real rate. They focus on shorter-run r* and, rather than make r* a direct function of growth in potential output, Koenig and Armen draw on signals from the financial markets and changes in household wealth. They argue that wealth growth and long-term yields do a good job of picking up changes in growth prospects and capture movements in other r* determinants.

The Koenig–Armen model says that the short-run neutral real rate was negative 1.3 percent in the first quarter of 2016, about 1.5 percentage points below the latest Laubach–Williams estimate of the longer-run rate and only 15 basis points above the actual real rate. Policy was only modestly accommodative last quarter, according to Koenig–Armen.

In my view, the paper reaches five major conclusions---conclusions that I find myself broadly in agreement with:

There are many factors that influence the level of the equilibrium real short-term interest rate. Real potential GDP growth may be one factor, but the real equilibrium rate is also affected by financial conditions, uncertainty and risk aversion, financial market performance (e.g., bubbles and busts) and the degree of restraint exerted by the stringency of banking and financial market regulation.

There is little evidence supporting the so-called secular stagnation view that the equilibrium real short-term rate will persistently remain near or below zero.

The equilibrium real short-term rate is non-stationary. Thus, it will not necessarily revert back to some long-run average value.

U.S. and global markets are integrated to a significant degree. As a result, the equilibrium real short-term rates both here and abroad will tend to move together. This seems especially germane in the current environment in which very low long-term government bond yields in Europe and Japan appear to have been an important factor in pulling U.S. long-term yields lower over the past year or so.

Given the uncertainties about the current and future levels of the equilibrium real short-term rate, an inertial policy rule may lead to better outcomes. As a consequence, the process of normalization of monetary policy should proceed cautiously, with short-term interest rates more likely to rise only gradually toward the equilibrium real short-term rate.
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My point estimate is that the longer-run value of the federal funds rate is 3 percent, well below its long-run historical level of 4 percent. At the same time, I also have little confidence about the accuracy of this specific estimate. So you see that I come out in a very similar place as the authors of this years Monetary Policy Forum paper. They suggest that the long-run equilibrium real federal funds rate might be in the range of 1 to 2 percent. Add on 2 percent inflation, you end up in just about the same place as my current long-term 3 percent nominal federal funds rate point estimate.

And I would say even if you consider our forward guidance we put in place in march, the committee indicated that even after we think the time has come to raise rates, that we think it will be some considerable time before we move them back to historically normal levels, and that reflects -- well, different people have different views, but to my mind, it in part reflects the fact that headwinds holding back the recovery do continue. Productivity growth has been slow, and of course, we need to be cautious to make sure that the economy continues to recover.

Even when the economy gets back on track, it doesn't mean that these headwinds will have completely disappeared. And in addition to that, productivity growth is rather low. At least that may not be a permanent state of affairs, but it's certainly something that we have seen in the aftermath. We'll -- we've seen it during most of the recovery. That's a factor that I think is suppressing business investment and will work for some time to hold interest rates down. These concerns and these factors are related to what economists are discussing, including secular stagnation. The committee -- you know, when it thinks about what is normal in the longer run, the committee has recently slightly reduced their estimates of what will be normal in the longer run. It -- the median view on that is now something around 3 and 3 1/4 percent, but we don't really know. But it's the same -- the same factors that are making the committee feel that it will be appropriate to raise rates only gradually, they're some of the same factors that figure in the secular stagnation.

My view is that the neutral federal funds rate consistent with trend growth is currently very low. That’s one reason why the economy is not growing very fast despite the current accommodative stance of monetary policy.  Although the neutral rate should gradually normalize over the long-run as economic fundamentals continue to improve and headwinds abate, this process will likely take many years.  In the meantime, the federal funds rate level consistent with the Committee’s objectives of maximum sustainable employment in the context of price stability will likely be well below the long-run level.

Well, in the long run of course, I’ve said in public speeches, we need to have the policy rate at least higher than 3%. But now remember that’s a long time ahead. I said 3 1/2% to 4 1/2% and a half in a very long period. So that’s quarters or maybe even years ahead depending on how the economy recovery goes.

The neutral funds rate is the rate consistent with an economy operating at its potential growth path and with stable inflation. There are many factors and uncertainties involved in assessing the neutral rate. With such caveats in mind, I think the neutral long-run real fed funds rate is somewhere in the neighborhood of 2 to 2-1/2 percent.

I nevertheless considered the larger-than-usual cut in the funds rate prudent because of two features of the current environment. First, the stance of monetary policy before the September meeting was probably a bit on the restrictive side, at least according to many estimates of the so-called “neutral” or “equilibrium” federal funds rate. In fact, the stance of policy was growing more restrictive as core inflation gradually trended down. Second, with the economy operating near potential and inflation well contained, a case could have been made that the funds rate would need to move down toward a neutral stance, even if there had not been a financial shock.

Moskow declined to explicitly state what the ideal inflation rate or funds rate would be. "I don't want to try a number -- five and a quarter is the appropriate rate at this particular time," he said. 

From a MarketNews summary of a CNBC interview

I don't think policy is restrictive, and in fact I see that policy is, if anything, somewhat accommodative.

In a Market News interview

Poole, who is on the voting panel of the Federal Reserve this year, again raised the prospect that the Fed's target rate could remain steady at 5.25% for some time to come, if growth remains on the expected path of 3%, and inflation continues to moderate.

"If that comes to pass," he said, the current target rate could be judged as "neutral." 

Nevertheless, Poole reiterated he would be ready to raise rates again to curb a rebound in inflation.   "I'm prepared to lean on the side of raising rates to make sure that inflation comes back convincingly in the 1-2% range [for core PCE].

As reported by Dow Jones News

When I say growth is going to, for a time, slow slightly below a sustainable pace, that is equivalent to saying at the moment I regard the real fed funds rate as modestly, mildly restrictive. 

In response to a reporters question after a speech.

     One convenient way {to calculate a neutral real funds rate} that's very popular and easy to use is to take the Federal Funds rate target and subtract trailing 12-months core CPE inflation and using that - use that essentially as a proxy for expected inflation going forward. If you have on hand expected measures of sort of inflation over a one year horizon you can use those as well...

    Well, we've been growing rapidly, taking slack out of the economy, and we're now making a transition to a period of sustained growth around trend. The last period of sustained growth around trend that we experienced was '95 to 2000. During that period measured the way I suggested, real rates were between three-and-a-quarter and five percent. Measured that way the real rate's current about just over two-and-three-quarters. So we're under three and some distance away from the bottom end of {the earlier range}.

It appears to me that the federal funds rate currently lies in a vicinity that is roughly appropriate for the Fed to attain its key objectives over the medium run...

In the present circumstances, I would consider it appropriate for the actual rate to be a bit above the neutral rate—in other words, I'd like it to be modestly restrictive—to promote price stability, especially given that the economy may be operating with labor and product markets that are a bit on the tight side.

As a result of these actions, the funds rate now (4 ¾%) has returned to a more normal level and is within the range most analysts would associate with neutrality. In fact, the funds rate now may be at the upper end of the range I would associate with neutrality.