Has the market-clearing or 'natural' short-run interest rate been negative over the past seven years? The answer to this question would go a long ways in ending much confusion about Fed policy. If the answer is yes, then the Fed has not been 'artificially' suppressing interesting rates as many have claimed. If the answer is no, then then Fed has been keeping monetary policy too loose. In other words, one cannot use interest rates to talk about the stance of monetary policy unless one compares them to their natural rate level.
There is a problem, however, in making this comparison. The natural interest rate is not directly observable, it has to be estimated. Michael Darda, chief economist of MKM Partners, provides one estimate of it and is reproduced in the figure below. Darda's estimate illustrates how knowing both the actual interest rate and the natural interest rate allows us to think more clearly about the stance of monetary policy. It shows that the Fed was a bit too easy during the boom period (the actual interest rate was less than the natural rate) and too tight during bust period (the actual interest rate was above the natural rate). Darda's estimates also shows that the gap between the actual and natural has only slowly converged since 2009, a pattern consistent with the slow recovery from the Great Recession. Other estimates tell similar stories such as the one from Robert Barsky et al (2014) published in the American Economic Review.
While these estimates are nice, it would be immensely helpful if the Federal Reserve published its own monthly estimate of the short-run natural interest rate. The Fed has a huge research staff, lots of resources, and is capable of providing this important information. It would be in the Fed's own best interest if it did so. Imagine if the Fed could point to a figure like the one above whenever someone accused it of artificially suppressing interest rates. It would make everyone's life much easier.
Well, today we learned from the October 2015 FOMC minutes that this information is being produced by the board of governors staff (my bold):
The staff presented several briefings regarding the concept of an equilibrium real interest rate—sometimes labeled the “neutral” or “natural” real interest rate, or “r*”—that can serve as a benchmark to help gauge the stance of monetary policy. Various concepts of r* were discussed. According to one definition, short-run r* is the level of the real short-term interest rate that, if obtained currently, would result in the economy operating at full employment or, in some simple models of the economy, at full employment and price stability. The staff summarized the behavior of estimates of the shortrun equilibrium real rate over recent business cycles as well as longer-run trends in real interest rates and key factors that influence those trends. Estimates derived using a variety of empirical models of the U.S. economy and a range of econometric techniques indicated that short-run r* fell sharply with the onset of the 2008–09 financial crisis and recession, quite likely to negative levels. Short-run r* was estimated to have recovered only partially and to be close to zero currently, still well below levels that prevailed during recent economic expansions when the unemployment rate was close to estimates of its longer-run normal level.
The Fed staffers are producing estimates of the short-run natural interest rate so why not share it with the public? Why not add it to Fed's collection of statistics that publishes on its website? It sounds like the Fed has a range of estimates so it could report point estimates along with confidence intervals surrounding it. So how about it Janet Yellen? Why not go all natural at the Fed?