As has been widely discussed, the level of inflation-adjusted or real interest rates needed to keep the economy near full employment appears to have fallen to a low level in recent years.
Although estimates vary both quantitatively and conceptually, the evidence on balance indicates that the economy’s “neutral” real rate – that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential – is likely now close to zero.3 However, the current real federal funds rate is even lower, at roughly minus 1-1/4 percentage point, when measured using the 12-month change in the core price index for personal consumption expenditures (PCE), which excludes food and energy.