growth in the second quarter was strong. real gdp increased at a 4 - 1 / 4 percent annual rate, a very rapid pace nine years into the expansion. looking ahead, it seems likely that growth will remain solid. confidence is high, private domestic demand momentum is solid, and recent fiscal stimulus will continue to work its way through the economy, at least for the next year or so. the labor market is also strong. so far this year, payroll gains have averaged more than 200, 000 per month, a step - up from the 2017 pace and well above estimates of the pace necessary to absorb new entrants into the labor force. among prime - age see board of governors ( 2018b ). - 6 workers, the employment - to - population ratio is 79. 3 percent, up almost 1 percentage point over the past year. these developments are heartening, suggesting the tight labor market is providing employment opportunities to more americans. nonetheless, this is still about 1 percentage point below its previous cyclical peak, suggesting there may be some room for further gains. in another encouraging development, wage gains in the august report reached their highest level since the depth of the financial crisis, although wage growth remains moderate by historical standards. while a variety of wage measures have accelerated over the past year and there is anecdotal evidence of worker shortages in some sectors and regions, there is no evidence of rapid acceleration in the aggregate wage indicators. at 3. 9 percent, the august unemployment rate was about 1 / 2 percentage point lower than the previous year. if unemployment continues to decline at the same rate as we have seen over the past year, we will soon see unemployment rates not seen since the 1960s. historically, the few periods when resource utilization has been at similarly tight levels have tended to see elevated risks of either accelerating inflation or financial imbalances. 13 for instance, the inflation process may change in unexpected ways. so far, the data on inflation remain encouraging, providing little signal of an outbreak of inflation to the upside, on the one hand, and some reassurance that underlying trend inflation may be moving closer to 2 percent, on the other. core personal consumption expenditures ( pce ) prices have increased 2 percent over the past 12 months, consistent with the fomc ’ s objective. survey measures of inflation expectations remain stable in the lower end of the historical ranges, while market - based see brainard ( 2018 ). - 7 measures of inflation compensation remain stable at levels above the

for release on delivery 12 : 45 p. m. edt september 12, 2018 what do we mean by neutral and what role does it play in monetary policy? remarks by lael brainard member board of governors of the federal reserve system at the detroit economic club detroit, michigan september 12, 2018 it is a pleasure to be in detroit. i started my career working here in the motor city, and i have followed the fortunes of this area with interest ever since. a few years ago, i visited some of detroit ’ s neighborhoods with our local officials at a time when damage from the crisis was still pervasive. while challenges remain in many of the city ’ s neighborhoods, since that time the metropolitan area overall has seen signs of a rebound in business activity and investment, and the unemployment rate has continued to trend downward, recently falling to 4. 3 percent. 1 this is similar to the nation ’ s economy more broadly. while challenges remain for many, aggregate growth is strong, and the economy is meeting our full employment and inflation objectives. given the outlook, it comes as no surprise that the federal open market committee ( fomc ) has been gradually raising interest rates from crisis - era lows and sees further gradual increases as likely to be appropriate in its most recent statement. 2 before discussing the outlook, it might be useful to first explore some concepts that are important in informing the path of rates. what is the neutral rate of interest? in thinking about how we should set the federal funds rate, many policymakers and economists find the concept of the neutral rate of interest to be a useful frame of reference. so, what does the neutral rate mean? intuitively, i think of the nominal neutral interest rate as the level of the federal funds rate that keeps output growing around its potential rate in an environment of full employment and stable inflation. 3 i am grateful to john roberts of the federal reserve board for his assistance in preparing this text. these remarks represent my own views, which do not necessarily represent those of the federal reserve board or the federal open market committee. see board of governors ( 2018a ). the closely related concept of the natural rate of interest - - the rate of interest at which investment and savings are equilibrated at full employment - - is originally attributed to swedish economist knut wicksell. - 2 focusing first on the “ shorter - run ” neutral rate, this does not stay fixed, but rather fluctuates along with important changes in economic