Stripped to essentials, the question over how high rates need to go in this cycle is really about what interest rate the economy needs in the longer run to balance supply and demand.

Fed officials considered that question during a staff briefing on the “equilibrium” real rate at their October meeting. It’s important because if the Fed overshoots that rate, the economy could slow, and if it undershoots it could lead to another bubble or possibly inflation above their 2 percent target.

In the short run, the staff concluded, this equilibrium inflation-adjusted rate was estimated to be “close to zero currently,” the minutes of the meeting said. Right now, the real fed funds rate is around minus 1.2 percent, which is why Fed officials say policy will remain accommodative even if they raise interest rates this month.


Longer Run


Over the longer run, Fed officials estimated the rate at 3.5 percent, or 1.5 after subtracting for 2 percent inflation, according to their median estimate in September.

Their estimates are likely to fall further in the December forecasts that will be published Wednesday, said Andrew Levin, a Dartmouth College professor and former Fed Board staff member who advised then-Vice Chair Janet Yellen in 2012 before she became chair.

“I wouldn’t be surprised if the central tendency clusters around 3 percent, about half a percentage point lower than in September,” Levin said in an interview. “By next June, they will probably revise further and write down numbers like 2.5 percent.”

Such revisions could validate current rates in the Treasury market and keep yields low. Forecasts involve a mixture of judgments about everything from investment to labor force growth. Here’s a summary:


The 3 Percent Case


Falling Unemployment: Many economists in the 3 percent camp foresee further declines in the unemployment rate from 5 percent in November. Both JPMorgan Chase and Macroeconomic Advisers in St. Louis forecast the jobless rate will decline by about another half percentage point by the end of 2016.