An Alternative Narrative behind the Persistently Low Natural Rate

San Francisco Fed President Williams attributed low natural rate to longer-term economic factors beyond the influence of central bank policy, such as demographic shift, productivity growth, as well as demand for safe assets. Nevertheless, policy-induced asset price appreciations benefit a small segment of the population to exacerbate rising inequality, and factors such as higher housing costs and lower prime-age homeownership contributed to decline on birth rate. In terms of productivity, expansionary monetary policy induced investors to “reach for yield,” and prolonged “lower for longer” policy regime pushed institutions to fund unproductive “zombie” firms to unintentionally drag on aggregate productivity. Furthermore, BIS research argued that impact of purely real factors on real interest rates may be overestimated, and influence of monetary factors may be correspondingly underestimated to reduce natural rate’s efficacy as a policy guidepost. Finally, global unconventional policies depressed long-maturity bond yields to perversely heighten demand for safe assets.