3 See, for instance, Lael Brainard (2015), “Normalizing Monetary Policy When the Neutral Interest Rate Is Low,” speech delivered at the Stanford Institute for Economic Policy Research, Stanford, California, December 1, https://www.federalreserve.gov/newsevents/speech/brainard20151201a.htm; and Kathryn Holston, Thomas Laubach, and John C. Williams (2016), “Measuring the Natural Rate of Interest: 1  -2the policy rate by only 1½ percentage points before hitting the effective lower bound—in contrast to previous decades when the policy rate would have been cut by 4½ to 5 percentage points, on average, to buffer the economy from an adverse shock.
The reduced scope to cut the interest rate could increase the frequency and duration of periods when the policy rate is pinned close to zero, unemployment is elevated, and inflation is below target. In turn, the greater likelihood of extended periods of low inflation at the lower bound risks eroding inflation expectations and further compressing the scope for cutting the interest rate.