SIEPR and the Hoover Institution Debate: Has the “Neutral” Interest Rate Declined and How Does It Affect Fed Decisions?
, Chair of Monetary Economics at Goethe University of Frankfurt and Member of the German Council of Economic Experts
John C. Williams
, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco
John B. Taylor
, Mary and Robert Raymond Professor of Economics at Stanford University; George P. Shultz Senior Fellow in Economics at the Hoover Institution; SIEPR Senior Fellow
About the Debate:
This is the biggest question for monetary policy and financial markets today. The neutral rate is defined as “the value of the federal funds rate that would be neither expansionary nor contractionary” to use the words of Fed Chair Janet Yellen. In the past three years the Fed has sharply cut its estimate of the rate with significant implications for all interest rates going forward.
Volker Wieland and John Williams are two of the world’s foremost experts on this question. Research by John Williams finds that the neutral rate is now much lower than in the past, and is the evidence most widely-cited by his colleagues on the Federal Open Market Committee. Research by Volker Wieland, in contrast, finds no such decline, and he and his colleagues on the German Council of Economic Experts have highlighted the uncertainty in reports to Chancellor Angela Merkel and other officials.
Volker Wieland and John Williams both received their Ph.D. in economics from Stanford University in 1995 with research support from SIEPR. They then joined the staff of the Federal Reserve Board, where they did joint research on monetary policy, and launched highly successful careers in economic research and policy. They are regular participants in conferences and research at the Hoover Institution.