2 weeks ago
Fed Revisits 1997 Debate Over Rising Neutral Interest Rates
The Federal Reserve sets interest rates to help guide the economy.
One important idea is the neutral rate, which is the rate that neither speeds up nor slows down the economy.
In 1997, officials discussed what would happen if that neutral rate quietly increased.
J. Alfred Broaddus said keeping the same regular interest rate could then act like an easier policy.
That is because the unchanged rate would be lower compared with the economy’s new neutral rate.
He argued that policymakers might need to raise nominal rates when the underlying situation changes.
The same question could arise in a policy discussion in September 2026.
The main issue is whether a rate that stays still can effectively become more supportive of the economy.
The Federal Reserve debated in 1997 whether the economy’s neutral interest rate was rising.
J. Alfred Broaddus warned that unchanged nominal rates could amount to an easing of monetary policy.
Broaddus made the remarks to Alan Greenspan during a Federal Reserve meeting.
The debate concerned whether nominal interest rates should rise as economic conditions changed.
The 1997 discussion is presented as potentially relevant to a September 2026 policy debate.
- Who
- The Federal Reserve, including J. Alfred Broaddus and Alan Greenspan, was involved in the 1997 discussion.
- What
- Officials debated whether nominal interest rates should rise if the neutral interest rate was increasing.
- Where
- The discussion took place within the Federal Reserve; the article specifically identifies the Federal Reserve Bank of Richmond through Broaddus’s position.
- When
- The quoted discussion occurred in 1997; the issue is described as relevant to September 2026.
- Why
- Because keeping nominal rates unchanged while the neutral rate rises could effectively ease monetary policy.
Keep Nominal Rates Unchanged
Raise Nominal Rates
Response to a Rising Neutral Rate
Keep Nominal Rates Unchanged
Maintaining the same nominal rate may appear to preserve existing policy settings.
Raise Nominal Rates
If the neutral rate has risen, maintaining the same nominal rate could effectively ease monetary policy.
Policy Adjustment
Keep Nominal Rates Unchanged
Policymakers could avoid changing rates when the shift in the neutral rate is only gradual or difficult to observe.
Raise Nominal Rates
Policymakers should adjust nominal rates higher to recognize changes in the economy’s equilibrium conditions.
Key facts
- Historical year
- 1997
- Federal Reserve official quoted
- J. Alfred Broaddus
- Broaddus’s institution
- Federal Reserve Bank of Richmond
- Other Fed official addressed
- Alan Greenspan
- Policy issue
- Whether nominal rates should rise as the neutral rate increases
- Potentially relevant period
- September 2026
Quotes
J. Alfred Broaddus
President of the Federal Reserve Bank of Richmond in 1997
“If monetary policy failed to recognize the changes in the equilibrium situation and did not adjust nominal interest rates higher, then effectively, to use the language we normally employ, we would have eased monetary policy even if we maintained the same level of nominal interest rates”
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Sources
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