"Fed Money Easing Was Excessive After the Financial Crisis"

Christian Mathis, Indiana University Professor, Announces
US Neutral Interest Rate at 2.23% in Q4 Last Year
Never Negative from 2008 to Pandemic

A study has revealed that the Federal Reserve's (Fed) money supply behavior has been excessive since the 2008 global financial crisis.

Christian Matthes, a professor in the Department of Economics at Indiana University, stated this on the morning of the 31st at the Bank of Korea in Jung-gu, Seoul, during the 2024 BOK International Conference held under the theme "Changes in the Neutral Interest Rate and Implications for the Global Economy."

According to Professor Matthes' research, the neutral interest rate in the United States was 2.23% as of the fourth quarter of last year. He said, "Looking at the trend of the neutral interest rate, unlike after the pandemic, there was no period of negative rates after 2008," adding, "This suggests that the Fed's monetary policy after the financial crisis was possibly excessively accommodative." The year 2008 was when the global financial crisis occurred due to the subprime mortgage crisis. To overcome the crisis, the U.S. implemented quantitative easing policies that increased the money supply.

The neutral interest rate refers to the level of interest rates that neither stimulates nor restrains economic activity or inflation. Central banks determine policy rates based on estimates of the neutral interest rate. For example, if the benchmark interest rate is raised above the neutral rate but the economy remains overheated, it can be judged that the actual neutral rate is higher than the estimate, which may influence future monetary policy directions.

Graph of the estimated annual neutral interest rate in the United States by Professor Christian Matthes. Source=Bank of Korea

On this day, Professor Matthes introduced his paper titled "Measuring the Neutral Interest Rate: A Comparison of Two Approaches," presenting a new estimation methodology for the neutral interest rate based on a novel time series approach and providing estimation results for the United States. The estimation results show that the upward trend of the U.S. neutral interest rate has recently slowed. The neutral interest rate has risen since the pandemic due to unprecedented shocks that changed macroeconomic conditions, and the U.S. responded with expansionary fiscal policy and accommodative monetary policy, which led to inflation.

According to Professor Matthes' research, the 90% confidence interval for the U.S. neutral interest rate is between 1.42% and 3.22%. This figure was estimated using quarterly real interest rate data for the U.S., which was derived by realigning the yield on 90-day T-bills (U.S. government bonds with maturities under one year) with the GDP deflator.

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