I’ve previously argued that, in such circumstances, optimal policy prescriptions for the federal funds rate’s path diverge notably from those of standard rules.15 For example, David Reifschneider and John Williams have shown that when policy is constrained by the effective lower bound, policymakers can achieve superior economic outcomes by committing to keep the federal funds rate lower for longer than would be called for by the interest rate rules that serve as reasonably reliable guides for monetary policy in more normal times.16 Committing to keep the federal funds rate lower for longer helps bring down longer-term interest rates immediately and thereby helps compensate for the inability of policymakers to lower short-term rates as much as simple rules would call for.
I once again welcome you to Washington and wish you a stimulating and productive conference.