3 A fall in neutral rates increases the likelihood that a central bank’s policy rate will hit its effective lower bound (ELB) in future economic downturns.
That development, in turn, could make it more difficult during downturns for monetary policy to support spending and employment and to keep inflation from falling too far below the central bank’s objective—2 percent in the case of the Federal Reserve. 4 Another key development in recent decades is that price inflation appears less responsive to resource slack.