What level of rates constitutes neutrality?
The real [inflation-adjusted] rate of interest that will clear the markets changes over time. I don’t want to say it cycles up and down. But it fluctuates. Over a long period of time, it comes out as some average. But that average…provides essentially no guidance whatsoever to [what to do with] short-run monetary policy. What we need to do is to make sure that we raise the federal funds rate rapidly enough that you don’t run the risk that the real rate of interest will fall even though the nominal rate is rising. Q: Is there a danger of that happening now? A: You always have to frame this question in terms of inflation expectations. What’s past is past. To try to understand the effects of the recent increase in the rate of inflation on inflation expectations is an important part of this policy management we face. Q: So what’s happening with inflation expectations? A: The longer-run expectations haven’t changed. But near-term expectations of inflation have gone up somewhat over the la
