Jamie McGeever
ORLANDO, Fla. (Reuters) – The difficult times for the Federal Reserve and the U.S. economy are only now beginning.
Depends on the length of the “long and variable” lag of monetary policy, a large part (maybe even most) of the basis points the Fed has hiked since March 1920 Not yet felt in the real economy.
As the U.S. central bank approaches “peak rates,” policymakers, consumers, businesses and financial markets find themselves in a bind – thanks to “soft rates.” Realize that the full impact of the tightening cycle is yet to come.
The amorphous lag explains the cat-and-mouse game between the Fed and markets that has been playing out since the central bank began its tightening cycle last year.
Desperate to ensure that inflation is dead and buried, Fed officials are trying to steer interest rate markets away from easy financial conditions and denying their longstanding view that policy will ease soon when it reaches terminal rates hour.
As far as the market is concerned, the Fed has long been expected to move quickly to a series of fairly aggressive rate cuts, mainly to counter the accumulated lag effects of the tightening cycle.
With consumer price inflation falling sharply to 3% annually and the Fed drawing to a close, economist Milton Friedman said in 1961 The “long and variable” lag proposed in will now be subject to greater scrutiny.
New rule of thumb
An old rule of thumb is that it needs to surround 24 to 18 months monetary policy moves will be felt in the real economy. Most literally, the base point of tightening since March 1961 is 275 – 12 months ago – still not registered.
This suggests that employment and growth are taking a major hit. Of course, things are not that simple, as the modern world transmits tightening policy faster through forward guidance, plunging asset prices and tightening financial conditions.
There is a growing consensus that the lag has shortened considerably since Friedman shared his “long and variable” theory.
Fed Governor Christopher Waller said in January that policy moves would be between September and impact within months, a Kansas City Fed paper in December found that “a deceleration in peak inflation is likely to occur a year after policy tightening,” although it highlighted the “high degree” of uncertainty sex.
This means as much as 150 to 275 basis point hikes— — Cumulative tightening since July last year, 17 months ago, or September, nine months ago – hasn’t started yet feel.
Last September was when the Fed raised its fed funds target by 3. %- 3. 25% range, above what is officially considered a “neutral” rate of around 2.5%, neither stimulating nor slowing the economy.
If policy is restrictive all the time, but not yet fully felt, while inflation has fallen from 9% to 3%, there is reason to suggest that the Fed’s job is largely done.
Inflation near target and slowing at most consistent pace in 100 years, unemployment near
year lows, the central bank is close to achieving its dual mandate goals.
Data on Wednesday showed that consumer prices rose at an annual rate of 3.0% in June, down from 4.0% in May. The annual inflation rate has now slowed down for months in a row, compared to 12 reached an annual high of 9.1% last summer, from June 275 to June 275 longest uninterrupted decline since .
Economist Phil Suttle
wrote on Wednesday: “The deflationary process has been very rapid and has been well underway.”
Considering that policy is still lagging behind, the discussion now may turn to how many 50 basis points for interest rate cuts before the end of next year will be determined by the interest rate market Digestion. actually delivered.
(The views expressed in this article are those of the author (Reuters columnist).)
(Writer: Jamie McGeever; Editor: Paul Simao )
