Are Interest Rates at Neutral? Markets Certainly Hope So
Fed Chair Jerome Powell dangled the idea that the central bank has already done the bulk of what is needed to combat inflation. Let’s hope he’s right.
Powell’s unscripted remarks at his press conference on Wednesday — that interest rates have reached a “neutral level” after the just-announced 75-basis-point interest-rate increase
Neutral is shorthand for the crucially important notion that the level of interest rates is consistent with monetary policy being neither contractionary nor expansionary
I have no precise estimate for neutral... I have a hunch, but am far from certain, that we are still below it.
Mohamed A. El-Erian Bloomberg 28 juli 2022
After more than 20 years of low, stable inflation, it's come roaring back — at more than 9% — and it may never return to pre-pandemic levels.
Economists had figured it out in the 1990s. If we just picked a target, say, a 2% inflation rate, it would become a self-fulfilling prophesy. People could rely on that level of inflation because the Federal Reserve could make it happen, and wages and prices would rise, accordingly.
When I was in graduate school, I was taught that best practice in monetary policy is to target a certain level of inflation, say 2%. But one of my professors from those days, Jean Boivin, now Head of the BlackRock Investment Institute and former Deputy Governor at the Bank of Canada, recently argued that economists may have not have actually solved the inflation problem after all; We may have just been very lucky.
https://englundmacro.blogspot.com/2022/07/the-great-moderation-is-dead.html
Even before the pandemic, there were flaws in the idea that the Fed could choose the rate of inflation. Inflation was below-target for years no matter how low the Fed kept rates.
Now many economists are speculating that once the Fed gets inflation down to 4% or so, it may give up on tightening further, especially if we are in a recession by then.
Allison Schrager Bloomberg 18 juli 2022
Neutral at my blogg
https://englundmacro.blogspot.com/search?q=neutral
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