Good post on this topic:
Harry Potter's Monetary Policy Wand?
“The Fed is outside of politics but not our civic life. It has an obligation to display more intellectual rigor and honest realism than it did this week.”
Former Treasury Secretary Lawrence Summers, The Washington Post, March 17, 2022.
The Federal Open Market Committee (FOMC) is reassuring us that, so long as we are patient, price stability will return without further pain. But its narrative seems less grounded in historical experience and more like something Harry Potter might have conjured at Hogwarts. By the end of 2024, the Committee expects trend inflation (measured by the price index of personal consumption expenditures excluding food and energy) to drop by more than 3 percentage points while economic growth remains above (and the unemployment rate below) its sustainable level. And, all this magic materializes with the real (inflation-adjusted) policy rate barely turning positive. Unsurprisingly, we share former Treasury Secretary Summers’ skepticism about the FOMC’s fantasy (see the citation above).
The principal means by which the Fed affects the inflation outlook is by influencing financial conditions. Yet, having telegraphed its policy shift for months, the FOMC’s most recent actions on March 16—initiating a series of rate hikes and suggesting that balance sheet tapering could begin soon—barely affected the ease with which firms and households obtain financing. To see this, consider the two-day change of key financial indicators from the end-of-day prior to the announcement. The 10-year Treasury yield rose by 5 basis points, the two-year yield by 9 basis points, the S&P 500 increased more than 3%, and the dollar index fell around 1%. And, while financial conditions are indeed a bit tighter than six months ago—when about one-half of FOMC participants anticipated no interest rate hikes in 2022—these conditions remain quite accommodative (see here).
https://www.moneyand...ary-policy-wand
