The natural rate is 6.5%

At least according to the Fed's new press release. The release says:
"the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal."
So if unemployment falls below 6.5% expect higher rates of interest, associated to what would be in Bernanke's view the risk of excess demand.

Note that the inflation target continues to be 2%, so even Blanchard's mild-mannered rethinking of macroeconomics (that Krugman and others having been pushing) for a higher inflation target has not been accepted by Bernanke. Obama should get rid of Bernanke next time he has the chance.

PS: In contrasting news the Reserve Bank of India seems to be suggesting, at least according to The Economist, that it would raise its inflation target above 5%. Good for them.


  1. Well, in Bernanke's defense, Mankiw's version of the Taylor rule would imply a positive rate a bit above 2 with 6.5% unemployment and 2% inflation, so in that sense the policy being described here is a bit more exapnsionary than Greenspan's.

    What I'm wondering is, does this really represent a change? And, what's the theory behind it? Why do Blanchard, Bernanke, Krugman, etc. think that demand has fallen so much that with zero interest rates unemployment remains at or above 6.5 percent?

    1. Hi JW:
      I would say no. My point precisely that even if you want to call a higher inflation target a change (which I wouldn't), this hardly qualifies. It's far from clear that at 6.5% demand pull inflation will kick in. In fact, with the same level of labor force participation as in the late 1990s, now we have considerably more than 7.9% unemployment. Closer to 12% in the last calculations I publish in the blog. So we are really far from full employment indeed.

    2. I mean 7.7%. Oops. But the point remains, a good chunk of the decline in unemployment is due to reduced participation rates.

  2. Falando de taxa natural.. Na minha prova de IS-LM eu acho atribuí à ISLM uma taxa de juros "natural" que equilibra para o pleno emprego, mas to meio desconfiado se errei (ainda nao vi a nota)

    eu me confundi em algo? ja que na ISLM ha politica de base monetaria nao de taxa de juros, ou seja, se muda a Base monetaria e a taxa de juros "natural" converge para um nivel menor (oferta e demanda) é isso mesmo ou to errado?

    1. Certamente o Hicks (e o Modigliani) tinha uma taxa natural no modelo. Ou seja, fora a possibilidade da taxa ser negativa ou uma armadilha da liquidez, com flexibilidade de precos e salarios o sistema chegaria ao pleno emprego.


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