ORLANDO, Fla., July 13 (Reuters) – A tough test is ahead for the Fed and the US economy.
Depending on the length of the “long and fluctuating” monetary policy lag, a significant portion, perhaps most, of the Federal Reserve’s 500 basis point rate hike since March 2022 has yet to be reflected in the real economy. do not have.
Policy makers, consumers, businesses and financial markets feel stuck as the US central bank nears its “peak interest rates,” and while they appreciate the ongoing “soft landing,” the full tightening cycle is likely to continue. We recognize that the impact is yet to come. come.
The irregular delays explain the cat-and-mouse game between the Fed and markets that has continued since the central bank began its tightening cycle last year.
Eager to convince themselves that inflation is dead and buried, Fed officials seek to steer interest rate markets away from the easing of monetary conditions, leading to a long-standing stance of policy easing almost as soon as the final rate is reached. I tried to deny my point of view.
Markets have long expected the Fed to quickly steer a series of fairly aggressive rate cuts, largely to counteract the accumulated lagging effects of the tightening cycle.
With consumer price inflation dropping dramatically to 3% a year and the Fed’s rate hike campaign coming to an end, the “long and fluctuating” delay that economist Milton Friedman proposed in 1961 is likely to become more pronounced going forward. will be subject to strict scrutiny.
new rule of thumb
The old rule of thumb is that it takes about 18-24 months for monetary policy moves to be reflected in the real economy. Interpreted at the most literal level, the 500 basis point tightening since March 2022, 17 months ago, has yet to be recorded at all.
This suggests that jobs and growth have been hit hard. Of course, this is not so simple. This is because in the modern world, more austere policies are transmitted more quickly through forward guidance, asset price collapses, and tighter financial conditions.
Since Friedman shared his “long and fluctuating” theory, a growing number of people believe that delays have been significantly reduced.
Federal Reserve Governor Christopher Waller In January, he said it would take nine to 12 months for the impact of policy moves to show. kansas city feds In December, the report said it found that “a peak deceleration in inflation could occur about a year after policy tightening,” but stressed that uncertainty around that point was “high.”
This would mean that a 200-275 basis point rate hike, the cumulative tightening since July last year 12 months ago or September nine months ago, has not yet begun to be felt.
Last September, the Fed raised its target rate for the Federal Funds to a range of 3.00% to 3.25%, which officials consider a “neutral” rate that neither stimulates nor decelerates the economy, around 2.5%. surpassed.
The Fed’s job is pretty much done if the full impact of the fall in inflation from 9% to 3%, despite the much more restrictive policy, has not yet been fully realized. I can say
The central bank is close to meeting its twin mandate targets as inflation falls toward target, decelerating at its most consistent pace in 100 years and unemployment nears a 50-year low. .
Data on Wednesday showed consumer price inflation slowed to an annualized 3.0% in June from 4.0% in May. Annual inflation has slowed for the 12th straight month since last summer’s 41-year high of 9.1%, the longest streak since June 1920-June 1921.
“The process of deinflation has been rapid and is well underway now,” economist Phil Suttle said Wednesday.
Given the policy delays ahead, the debate is likely to shift to how much of the 150 basis point rate cut priced into interest rate markets by the end of next year will actually materialize.
(Opinions expressed here are those of the author, a Reuters columnist.)
By Jamie McGever.Editing: Paul Simao
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