Some slowing in growth relative to earlier decades was to be expected, reflecting slowing population growth and the aging of the population. More troubling has been the decline in productivity growth, which is the primary driver of improving living standards over time. 10 Second, the general level of interest rates has fallen both here in the United States and around the world.
Estimates of the neutral federal funds rate, which is the rate consistent with the economy operating at full strength and with stable inflation, have fallen substantially, in large part reflecting a fall in the equilibrium real interest rate, or “r-star.” This rate is not affected by monetary policy but instead is driven by fundamental factors in the economy, including demographics and productivity growth— the same factors that drive potential economic growth.