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Navigating by the Stars: The Natural Rate as Economic Forecasting Tool

Evan F. Koenig and Alan Armen

Abstract: Fed policymakers must assess the stance of monetary policy each time they decide whether the target federal funds rate should be changed. Several different benchmark, or “natural,” interest rates have been suggested for this purpose. The gap between the target funds rate and the natural rate should, in principle, help forecast real economic activity and inflation.

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