One difficulty in this cycle, given the power of fiscal trends and cycle volatility caused by Covid lockdowns, is assessing monetary policy lags. Inflation & unemployment rates, both lagging indicators, currently offer very little feedback for short term policy calibration. What can the Fed use effectively to understand and better time policy adjustment with due consideration to current transmission lags? For example, even though above trend growth does confirm a higher r* for the moment, it may drop like a stone when this industrial policy driven capex boom reaches a tipping point. Why not trim positive real rates a bit early, knowing that there is unlikely to be any inflation penalty for that, and it would ease stress on property / banking sector risk overhang? Not to mention the benefit to federal interest rate burdens that have risen sharply. It seems the slippage in policy lags allows for a small proactive clipping of this inflation coupon. FFs at 4.75% is probably no different than 5.25% in today’s economy.
One difficulty in this cycle, given the power of fiscal trends and cycle volatility caused by Covid lockdowns, is assessing monetary policy lags. Inflation & unemployment rates, both lagging indicators, currently offer very little feedback for short term policy calibration. What can the Fed use effectively to understand and better time policy adjustment with due consideration to current transmission lags? For example, even though above trend growth does confirm a higher r* for the moment, it may drop like a stone when this industrial policy driven capex boom reaches a tipping point. Why not trim positive real rates a bit early, knowing that there is unlikely to be any inflation penalty for that, and it would ease stress on property / banking sector risk overhang? Not to mention the benefit to federal interest rate burdens that have risen sharply. It seems the slippage in policy lags allows for a small proactive clipping of this inflation coupon. FFs at 4.75% is probably no different than 5.25% in today’s economy.