To those of you who have had my class, the arguments in this article will sound pretty familar. For you XP75ers, you will hear it all later. Here's the conclusion:
How far, and how fast, must the funds rate rise? What is neutral? It should be clear from this discussion that the answer is wholly dependent on economic developments well outside the scope of monetary policy. “Neutral” can only be defined relative to the state of the economy at a particular point in time. The economy of mid-2000 through mid-2003, characterized by distinct weakness in investment spending and employment growth, inevitably meant low real interest rates. Neutral in that situation meant a low—perhaps very low—funds rate to contain disinflationary pressures building in the economy.
Now, as the economy strengthens and investment and employment growth recover, the neutral setting of the funds rate is moving up. The distance it will go depends on myriad factors, most (if not all) of which will only be revealed in time (perhaps at a measured pace).
Of course, this is an assertion, not an explanation. Some of the explainin' is in the article. The rest is -- well, that's why we suit-up and take macro.