Second, what are the strategic and tactical considerations that underpin our decisions about the appropriate stance of monetary policy going forward? These questions are difficult because the interactions between monetary policy and the economy are complex. Policy affects the economy through many different channels, and, in turn, many factors influence the appropriate course of policy.
Gauging the current stance of monetary policy requires arriving at a judgment of what would constitute a neutral policy stance at a given time. A useful concept in this regard is the neutral “real” federal funds rate, defined as the level of the federal funds rate that, when adjusted for inflation, is neither expansionary nor contractionary when the economy is operating near its potential.