Getting smart. Second step: Accelerate the process!

In “Why So Slow? A Gradual Return for Interest Rates”, Vasco Cúrdia of the San Francisco Fed writes:

Short-term interest rates in the United States have been very low since the financial crisis. Projections of the natural rate of interest indicate that a gradual return of short-term interest rates to normal over the next five years is consistent with promoting maximum employment and stable inflation. Uncertainty about the natural rate that is most consistent with an economy at its full potential suggests that the pace of normalization may be even more gradual than implied by these projections…

…The natural rate of interest is the real, or inflation-adjusted, interest rate that is consistent with an economy at full employment and with stable inflation. If the real interest rate is above (below) the natural rate then monetary conditions are tight (loose) and are likely to lead to underutilization (overutilization) of resources and inflation below (above) its target.


… This Letter suggests that the natural rate of interest is expected to remain below its long-run level for some time. This implies that low interest rates over the next few years are consistent with the most efficient use of resources and stable inflation. The analysis also finds that the output gap is expected to remain negative even after the natural rate is close to its long-run level. Additionally, there is considerable uncertainty about both the short-run dynamics as well as what level should be expected in the longer run. All these considerations reinforce the possibility that interest rate normalization will be very gradual.

Want to accelerate the process, instead of “waiting for Godot”? Either introduce negative IOR or, better, do level targeting, like a Nominal Spending Target Level.

How? Illustration follows:

Accelerate process

After all, the Fed has for more than 20 years “chosen” the level and growth rate of nominal spending. In 2008 it made a big error, but since than it has pretty much chosen the level and growth rate. By choosing a new trend level and “target date”, it would define the transitional growth.


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