Fed's Kashkari: Policy has tightened a lot. How tight is it?

<p>Minneapolis Fed Pres. Neil Kashkari penned a report titled "Policy has tightened a lot. How tight is it?" on the Minneapolis Fed website. Below is a bulleted summary of that article:</p><ul><li>On May 6, 2022, published an essay on focusing on long-term real rates for evaluating monetary policy stance, highlighting their impact over short or nominal rates.</li><li>Updates on June 17, 2022, and September 26, 2023, reflected FOMC's policy tightening actions to address inflation.</li><li>Since the last update, notable developments include a rapid decrease in inflation, surpassing forecasts, and strong economic growth.</li><li>The FOMC aims for 2 percent headline inflation, with core inflation showing significant progress towards this target.</li><li>Despite falling inflation, real GDP growth and a strong labor market, with a 3.7 percent unemployment rate, have been observed.</li><li>This period has seen strong real economic activity without the expected monetary policy-induced economic slowdown.</li><li>The decrease in inflation is attributed more to supply-side improvements than to monetary policy's direct effects.</li><li>Monetary policy's critical role has been in anchoring long-run inflation expectations, crucial for achieving a soft landing.</li><li>Despite rapid inflation decline, the perceived dramatic tightening of the real federal funds rate may overstate actual monetary policy changes.</li><li>The long-term real rate, specifically the 10-year TIPS yield, is a better proxy for monetary policy stance, showing a smaller increase than suggested by short-term rates.</li><li>Assessments of monetary policy neutrality and its impact consider changes in sectors sensitive to interest rates, like housing and private investment, showing resilience and growth.</li><li>Current economic indicators suggest that the monetary policy stance may not be as tight as assumed, implying a reevaluation of what represents a neutral policy stance post-pandemic.</li><li>This analysis suggests the FOMC has room to observe further economic data before deciding on rate cuts, minimizing the risk of hindering the economic recovery.</li></ul><p>The report is consistent with the Fed Chair's stance that a March cut is not the base case. </p>

This article was written by Greg Michalowski at www.forexlive.com.