I think we've been carefully to reduce enthusiasm for the proposition that we can look at the world today and make tightly calibrated judgments with confidence about where equilibrium is, and therefore where we are against it. You know, as you know, you must know that those estimates, a lot of candle power is thrown at those estimates. And I think the state of the art shows wide bands of uncertainty around that measure. And that the center of the range moves around a lot over time, quite a lot over time.

From the audience Q&A session

A number of different techniques can be used to estimate the neutral rate and, based on such estimates, I consider it reasonable to put the current neutral rate in the range of 3-1/2 to 5-1/2 percent.

In the long term, we would want to be somewhere in that [neutral 3.5% to 4.5%] range...As the economy has grown well, we want to be in that range sooner rather than later.

Reasonable estimates place the neutral real federal funds rate in the range of 1.5 to 3.5%. With inflation now in the vicinity of 1.5%, the associated value of the nominal federal funds rate corresponding to “neutral” ranges from 3 to 5 percent.  Judged from the perspective of a neutral policy stance, monetary policy at present is accommodative.

At 2 ½ percent in nominal terms...the federal funds rate remains below the lower bound of the estimated neutral range.

The neutral range for the federal funds rate during the next several quarters and beyond will depend on how economic conditions unfold, but our experience suggests that during extended periods of reasonably sound and sustained economic performance, the neutral federal funds rate will almost certainly be above today’s level of 1.5 percent.  In fact, historical experience suggests that when our economy is operating soundly and when resources are at high levels of capacity utilization, the neutral range is likely to be 3 to 5 percent. Where does this estimate come from? Without going into the exact formula, the most important components in the equation are the rates of productivity growth and expected inflation. As either one of these factors moves up or down, so too will the neutral federal funds rate.

Estimates of the equilibrium rate are highly uncertain and may change over time. That said, most estimates put the current equilibrium rate in the range of 3-1/2 to 4-1/2 percent. In other words, according to these estimates, the funds rate would need to rise considerably above its current level for policy just to have a neutral effect on the economy. With the actual funds rate currently as low as it is, there is thus reason for a strong presumption that rates will need to keep going up as we move forward.

[A neutral real fed funds target rate] is something in the vicinity of 2.5 to 3.5 percent.  But many things can affect what 'neutral is--it is always difficult to answer with precision. [Reuters]

"Based on the core personal consumption price index, the historical equilibrium real funds rate averaged 2.67 percent from 1966 first quarter to 2003 fourth quarter,'' Parry said in an e-mail response to a question.

``Since the growth of productivity is running considerably higher than the average for that period, I assumed that a reasonable range for the equilibrium real rate would be 2.5 percent to 3.5 percent. I also assumed a reasonable estimate for inflation expectations would be a core PCE inflation rate of 1 percent to 2 percent.

``Therefore, the range for the nominal natural rate would be between 3.5 percent (2.5 percent real and 1 percent inflation) and 5.5 percent (3.5 percent real and 2 percent inflation)."

From a Bloomberg News column

A simple argument for arriving at this judgment is based on a standard I've used before.  The real interest rate from the TIPS market is about 3.8 percent now, and if we build in an anticipated inflation rate of about 2 percent, the equilibrium funds rate should be slightly less than 6 percent. The actual funds rate is more than that, indicating that monetary policy is on the tight side.  It made perfect sense to tighten monetary policy to this level last May when we were leaning against the inflation rates, but things have changed now and I no longer believe it makes sense to keep the funds rate this high.

As for the level of the natural rate, it is higher than it has been in some of the past forecasts, although as I noted it drifts down over time as the wealth-to-income ratio drifts down. I think the height is a result of the fact that the wealth-to-income ratio is a lot higher than we thought it was--or thought it was going to be a year or two ago--given what has happened to the stock market. Demand has been much stronger. In effect the experience, in terms of the level of the wealth-to-income ratio and the strength of demand at previous interest rates, has led us to think that the natural or equilibrium rate is a lot higher than we used to believe and a lot higher perhaps than it has been in history. If the strength of demand for producers’ durable equipment and so forth persists, the saving rate, even if it is creeping up, is going to be lower than it has been historically, and then the natural real rate will be high relative to history.