The current nominal neutral interest rate—or the level of the federal funds rate that is consistent with output growing close to its potential rate with full employment and stable inflation—is quite low at present.6 Adjusting for inflation, most estimates of the neutral rate are currently close to zero, compared with about 2 percent for the quarter-century prior to the financial crisis.7 A low neutral rate implies that conventional monetary policy has less room to respond when the economy is hit by adverse shocks.
With conventional monetary policy constrained in the vicinity of the lower bound, it is more difficult for the economy to recover and for inflation to move back to target.8 Policies that persistently raise aggregate demand alone can lift the neutral rate, but that may come at substantial cost.