Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 1-2, 2018 : Memo: The Neutral Rate and the Summary of Economic Projections: An Update

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Authorized for public release by the FOMC Secretariat on 1/12/2024

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
DIVISION OF MONETARY AFFAIRS

Date:

April 12, 2018

To:

Trevor Reeve

From:

Benjamin K. Johannsen

Subject: The Neutral Rate and the Summary of Economic Projections: An Update

The table below updates Bongard and Johannsen (2016) by analyzing recent releases of the Summary of
Economic Projections (SEP).1 I find that SEP projections are consistent with the assessment that the
short-run neutral rate ( ∗ ) in 2018 and 2019 rose by a little more than one percentage point between the
December 2017 and March 2018 SEPs. With relatively little change in the projected paths for the federal
funds rate and inflation, the implied projected gap between ∗ and the real federal funds rate has widened.
Table 1: Estimates of SEP-Implied
2018
2.15
0.83
0.63

March 2018 SEP
December 2017 SEP
September 2017 SEP

∗

2019
1.68
0.67
0.47

Model Addendum: To extract implied estimates of ∗ , I assume that the unemployment rate gap ( ),
defined as the deviation of the unemployment rate from its longer-run value, is determined by its own
) and ∗ , so that
lagged value and the difference between the lagged real federal funds rate (
∗

.

1

The innovation term ( ) captures events at time that were not predictable in earlier periods. I rearrange
equation (1) and take expectations to obtain
∗

1

.

2

For comparability with Bongard and Johannsen (2016), I assume that
0.86 and
0.14.2 Using
as the difference between the unemployment rate at the end
median SEP projections, I construct
as the difference between the nominal
of year
and its longer-run level, and I construct
∗
federal funds rate and one-year-ahead core PCE price inflation. The resulting implied values of
∗
for the three most-recent vintages of the SEP are displayed in Table 1.
and
1

Bongard, Michelle and Benjamin K. Johannsen (2016). "The Neutral Rate and the Summary of Economic
Projections," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, November 28, 2016,
https://doi.org/10.17016/2380-7172.1890.
2
Updated estimates of and are similar.

1 of 1