Morning Must-Read: James D. Hamilton, Ethan S. Harris, Jan Hatzius, and Kenneth D. West: The Equilibrium Real Funds Rate: Past, Present and Future
…and its relationship with trend GDP growth much more tenuous than widely believed… a wide range of plausible central estimates for the current level of the equilibrium rate, from a little over 0% to the pre-crisis consensus of 2%…. Dhis uncertainty, we are skeptical of the ‘secular stagnation’ view that the equilibrium rate will remain near zero for many years to come…. The disappointing post-2008 recovery is better explained by protracted but ultimately temporary headwinds from the housing supply overhang, household and bank deleveraging, and fiscal retrenchment…. The uncertainty around the equilibrium rate argues for more ‘inertial’ monetary policy than implied by standard versions of the Taylor rule… a later but steeper normalization path for the funds rate compared with the median ‘dot’ in the FOMC’s Summary of Economic Projections.