The drop in the forecasts by Federal Open Market Committee members "could translate into a longer period of accommodative monetary policy," according to a Federal Reserve Bank of San Francisco
As the FOMC's Summary of Economic Projections shows continued declines in the "estimates of the equilibrium real interest rate and the natural rate of unemployment," the Taylor Rule indicates "declines in the natural rate of unemployment could translate into a longer period of accommodative monetary policy and declines in the equilibrium real interest rate could translate into a lower average policy rate in the long run," according to senior vice president Mary C. Daly, senior economist Fernanda Nechio, and research associate Benjamin Pyle of the Bank's Economic Research Department.
The researchers note that projections for the natural rate of unemployment have been reduced from 5.6% in June 2013 to 5.1%, while the equilibrium real interest rate (red solid line) fell from 2.25% in January 2012 to 1.63% in June 2015, both drops were called "significant" by the authors.
Additionally the authors note, "Similar declines can be seen in other public- and private-sector forecasts."
One caveat the authors note, "[S]imple rules like the ones we apply here cannot fully capture the process of decision-making at the FOMC. However, the prescriptions from the simple rule illustrate the connection between natural rates and policy rates and show the sensitivity of policy to views on these values."
