A week before the Federal Open Market Committee’s next rate-setting meeting, Federal Reserve Governor Lael Brainard described the persistent near-zero interest rate environment as a “new normal” in which policymakers would be more attentive to unexpected economic weakness by resisting rate hikes. She noted that at the zero lower bound, changes to the fed funds rate are less effective at responding to downside risks — which in turn requires longer and more extensive periods of accommodative policy to guard against the economic fallout of rising rates.
The “new normal” is characterized by inflation at lower levels than projected, higher-than-anticipated labor market slack, weak overseas demand and a persistently lower post-crisis “neutral rate” for full employment, trend growth in GDP and stable prices. “Seven years into the expansion and with little sign of a significant acceleration in activity, the low neutral rate looks likely to persist,” Brainard said. “It may require a relatively more modest adjustment in the policy rate to return to neutral over time than previously anticipated.” She added that these factors “counsel prudence in the removal of policy accommodation” and raising rates to normal pre-crisis levels.