Parsing disagreement about future short-term interest rates

Disagreement over future nominal interest rates is currently high, creating challenges for central banks. This column argues that the real neutral rate of interest has a slow-moving, long-run component as well as a short-run component. The long-run ‘natural rate’ is determined by demographic characteristics and income inequality, while the short-run ‘neutral rate’ can be affected by transitory economic shocks. In the current environment, the distinction might be important to explain part of the disagreement about future nominal short-term interest rates.