Has the Fed done enough to get the inflation rate all the way back down to 2%?
One is that monetary policy is kept tight enough to beat inflation but causes a more abrupt slowdown.
The other is that tightening stops prematurely, the labor market stays too hot, and inflation stabilizes at more than 2%.
The problem is judging what level of interest rates is required to make it happen.
At any given point, the Fed can’t know for sure how firmly (if at all) its policy rate is restraining demand.
The so-called neutral rate (also known as r-star) is the rate that neither adds to nor subtracts from aggregate demand; it varies according to economic conditions and can only be estimated.
With core inflation at more than 4% and broader financial conditions far from tight, the current policy rate of 5.25% to 5.5% likely exceeds the neutral rate — but not by much.
Whether it’s enough to get inflation all the way back down to 2% remains an open question.
The Editors Bloomberg 15 augusti 2023
“the financial stability interest rate”
(which they call r**, not to be confused with r*, the neutral interest rate) — the threshold interest rate above which the central bank triggers a problem of financial stability.
“Persistently low real rates induce an increase in financial vulnerabilities and a consequent decline in the level of r**,”
Niall Ferguson Bloomberg 18 december 2022
https://englundmacro.blogspot.com/2022/12/the-threshold-interest-rate-above-which.html
The US Economy’s Not a Plane and It Won’t Land Gently
Niall Ferguson Bloomberg 13 August 2023
https://englundmacro.blogspot.com/2023/08/the-us-economys-not-plane-and-it-wont.html
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