With the Federal Reserve set to meet shortly, it’s past time to start asking just how restrictive current monetary policy is. Look no further than February’s consumer price index data. Core inflation ran 3.8% over the past year and at an annualized rate of 4.2% over the past three months.
The Fed sets policy with respect to where it thinks “neutral” interest rates lie. Rates below neutral stimulate the economy, while rates above hold it back. Neutral can’t be measured or observed directly, only estimated by complex, imprecise econometric models. The Fed’s latest projections put longer-run neutral policy rates at 2.5%, just where they were pre-Covid, and it believes current rates close to 5.5% are quite restrictive.
With inflation materially off its peaks from the summer of 2022, the Fed is contemplating when and how deeply to cut.
Continue reading the entire piece here at Barron's (paywall)
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Stephen Miran is an adjunct fellow at the Manhattan Institute, co-founder of asset manager Amberwave Partners, and a former senior adviser for economic policy at the U.S. Treasury, 2020–21. Sander Gerber is chief executive officer and chief investment officer of Hudson Bay Capital.
