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1 1 (February 25, 2019)

handle is hein.crs/govyif0001 and id is 1 raw text is: A Congressional aResearch Service Low Interest Rates, Part 2: Implications for the Federal Reserve February 25, 2019 Interest rates have been unusually low by historical standards since the 2007-2009 financial crisis. This Insight discusses the implications for monetary policy, and it frames this discussion in terms of the neutral interest rate. It is the sequel to a previous Insight, Low Interest Rates, Part 1. For background on monetary policy, see CRS Report RL30354, Monetary Policy and the Federal Reserve: Current Policy and Conditions, by Marc Labonte. The Neutral Interest Rate The neutral interest rate (sometimes called r*) is conceptual and not directly observed-it is the idea that at any given time there is some level for the federal funds rate that will neither stimulate nor hold back economic activity. The Federal Reserve (Fed) implements monetary policy by targeting the federal funds rate. The Fed raises or lowers the federal funds rate in an attempt to properly balance the tradeoff between its statutorily mandated goals-full employment and stable price inflation. Economists judge monetary policy to be contractionary or stimulative based on whether the actual federal funds rate is above or below, respectively, the neutral rate. As shown in Figure 1, monetary policy was contractionary for most of the 1980s because the federal funds rate was above the estimated neutral rate. Since the crisis, monetary policy has been stimulative because the federal funds rate has been below the estimated neutral rate. Congressional Research Service https://crsreports.congress.gov IN11056 CRS INSIGHT Prepared for Members and Committees of Congress -

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