Economists are thinking that the natural real interest rate might be negative… one factor that would lead them to think that way is that the economy is growing so slow. The principle behind that is this… if the real Fed rate is above the natural rate, the effect is contractionary upon real GDP. So if real GDP is growing slow, the conclusion is that the natural rate must be more negative than the real Fed rate which is below -1%.
But economists are expecting real GDP to trend back to where it was before the crisis. They are expecting real GDP to grow faster for that reason. Yet, they do not realize that real GDP is growing normally within this business cycle. Real GDP is growing towards its natural level and will arrive within the year. The natural level of real GDP is simply lower than it used to be.
The economy is growing with anxiety, uneasiness and concern. But it is still growing.
So if the natural rate were positive now, the effect of a negative real Fed rate would still be stimulative. The economy is being stimulated within its business cycle constraints. The constraint upon real GDP is tighter than people want to think. But you can only push against a wall and go so fast and so far. Thus real GDP grows slower than expected.
The real problem will appear when the wall of increasing utilization of labor and capital stops and we keep pushing hard expecting it to move to where we think it should go.