February 27, 2015 William C. Dudley, President and Chief Executive Officer. Remarks at the 2015 U.S. Monetary Policy Forum, New York City.
Remarks [snipped] “It is a great pleasure to have the opportunity to comment on this year’s Monetary Policy Forum paper, “The Equilibrium Real Federal Funds Rate, Past, Present and Future.”  Let me preface my remarks with the reminder that what I have to say today reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.I think this is a timely topic because it is relevant to several questions that are particularly important in the current environment.  First, if one were to use a Taylor-type rule as a guide to assess the stance of monetary policy, what equilibrium real federal funds rate would one currently use in the formula?  Given the performance of the economy in recent years, I think it would be very hard to justify the typical assumption of a 2 percent rate.Second, what will this equilibrium real rate be in the future?  This is particularly germane right now given that short-term forward interest rates derived from the Treasury yield curve have come down sharply since late 2013.  For example, the 1-year forward rate, 9 years ahead has declined sharply over the past year, falling from around 5 percent in December 2013 to just under 3 percent currently.  What can explain such a large shift in forward rates at such a long time horizon? Third, when U.S. monetary policy is normalized, how fast should we raise short-term interest rates?  In other words, what is the appropriate path back to the long-run equilibrium real federal funds rate, shallow or steep?..”