Korea Capital Market Institute

Former Federal Reserve Chair Janet Yellen successfully completed her term, leaving a bequest of the third longest economic expansion in US history through gradual monetary policy normalization. Her biggest achievement was to lower the estimate of the neutral interest rate, the final destination for policy rate hikes to be consistent with the weaker economic fundamentals. Jerome Powell took the oath of office as the new chairman of the Federal Reserve (the Fed) as the US economy was gaining more momentum for growth, and the government’s massive tax cut plan was raising the likelihood of an increase in potential growth. However, there are considerable uncertainties over the medium-and long-term effects of the tax cuts because it is a stimulus measure added to the economy which already reached full employment. The central bank’s neutral rate projections significantly affect its monetary policy and the real economy. Attention should be directed towards whether the Fed’s neutral rate estimate, which was constantly adjusted downward under Yellen, will turn upward under Powell.