- run neutral rate may adjust to it very slowly, due to a combination of weaker foreign demand growth, greater risk sensitivity as a result of the crisis, higher risk premiums for productive investment, and lower growth in potential output. the lower neutral rate means the normalization of the federal funds rate is likely to follow a more gradual and shallower path than in previous cycles, although the actual path will be determined by economic conditions. it also implies that the likelihood of the federal funds rate hitting the zero lower bound will be persistently greater than it has been previously, which could make it more difficult to achieve our objectives of full employment and 2 percent inflation. with the nominal neutral interest rate lower than in the past, and with policy options being more limited if conditions deteriorate than if inflationary pressures accelerate, the asymmetry in riskmanagement considerations counsels a cautious and gradual approach. references baily, martin neil, james manyika, and shalabh gupta ( 2013 ). “ u. s. productivity growth : an optimistic perspective ( pdf ), ” international productivity monitor, vol. 25 ( spring ), pp. 3 - 12. see the recent papers by gust, johannsen and lopez - salido ( 2015 ) and evans and others ( 2015 ). bis central bankers ’ speeches board of governors of the federal reserve ( 2014 ). " federal reserve issues fomc statement on policy normalization principles and plans, " press release, september 17. byrne, david, and carol corrado ( 2015 ). " recent trends in communications equipment prices, " feds notes. washington : board of governors of the federal reserve system, september 29. byrne, david m., stephen d. oliner, and daniel e. sichel ( 2015 ). " how fast are semiconductor prices falling? ( pdf ) " nber working paper series 21074. cambridge, mass. : national bureau of economic research, april. byrne, david, and eugenio pinto ( 2015 ). " the recent slowdown in high - tech equipment price declines and some implications for business investment and labor productivity, " feds notes. washington : board of governors of the federal reserve system, march 26. curdia, vasco ( 2015 ). " why so slow? a gradual return for interest rates, " frbsf economic letter 2015 - 32. san francisco : federal reserve bank of san francisco, october 12. del negro, marco, marc giannoni, matthew

just 1 percent per year over the recovery, about half the pace over the 50 years prior to the financial crisis. 12 given this data, the congressional budget office now estimates that the growth rate of potential output is only 1. 7 percent currently, less than half the rate during the 50 years before 2008. nevertheless, although there is evidence of a connection between low potential output growth and a low neutral rate, as pointed out by hamilton and others, the relationship is not precisely estimated, which leaves considerable uncertainty about the magnitude of the effect. 13 finally, investors'risk sensitivity appears to have been altered by the experience of tail risks during the crisis, which could have a persistent depressing effect on the neutral rate. to the extent that investors or firms are more attuned to the risks associated with capital investments than before the financial crisis, it increases the premium for risky investments, or the difference in return between a risk - free investment, such as overnight reserves, and somewhat riskier investment opportunities. a higher risk premium necessitates a lower risk - free rate to encourage the same amount of riskier investments as previously. consistent with this explanation, there is evidence that the gap between the return to capital investment and the risk free rate has risen. for example, according to dynamic stochastic general equilibrium models estimated by the federal reserve board and the federal reserve bank of new york, the natural rate of interest has been held down during the recovery by shocks that increase the difference between the marginal product of capital and the risk free rate, pushing down investment and reducing the level of capital. 14 in addition, a simple measure of the marginal product of capital suggests that the return to capital investment has not changed very much, or perhaps has even increased, over the past decade despite the decline in risk free rates. 15 implications for the path of monetary policy before addressing what a persistently low neutral interest rate might mean for the normalization of monetary policy, it is helpful to review inflation developments. because the federal funds rate is the real rate plus the expected rate of inflation and because it is the real rate that influences economic activity, the amount of monetary accommodation represented by a given nominal level of the federal funds rate decreases as expected inflation declines. in population growth has also moved gradually lower in the united states, though the effect has not been as large as in some foreign economies, where the size of the population is now stagnant or falling. it is unclear how persistent recent low rates of measured productivity growth will