Check Out Our Low, Low (Natural) Rates: ...Thomas Laubach and John C. Williams of the Fed have a new paper updating their estimates of the natural real rate of interest. For those new to the term, the natural rate is a standard economic concept dating back a century; it’s the rate of interest at which the economy is neither depressed and deflating nor overheated and inflating. And it’s therefore the rate monetary policy is supposed to achieve.
Laubach and Williams find that the natural rate has plunged in recent years, and is now very, very low. The particular statistical method they use is reasonable, but in any case — as they document — the result pops out for pretty much any plausible methodology. ...
L-W attribute the decline in the natural rate largely to the slowing of potential output, which in turn reflects demography and what looks like a slowdown in technological progress. That’s more speculative. But the low natural rate is as solid a result as anything in real time can be.
This in turn tells you several things. It says that all the complaints that the Fed is artificially keeping rates low are nonsense; rates are low because that’s what the real economy wants, and the Fed’s only alternative would be to create a depression.
It also casts even more doubt on the wisdom of the Fed’s urge to raise rates. Nothing in the economic situation suggests that rates are too low right now. ...
In any case, the message about what the Fed should do now is clear: nothing.