Published April 24
The Fed wants to raise rates quickly but may not know where to stop
'The Fed only knows where neutral is in retrospect'
By Nick Timiraos The Wall Street Journal
Federal Reserve Chairman Jerome Powell is shifting monetary tightening into a higher gear. His goal sounds straightforward — lift interest rates to "neutral," a setting that neither spurs nor slows growth.
But there's a catch: Even in normal times, no one knows where this theoretical level is. And these aren't normal times. There are good reasons to think the ground beneath the central bank's feet is shifting and that, after accounting for elevated inflation, neutral may be higher than officials' recent estimates.
At their meeting next month, officials are set to approve plans to shrink their $9 trillion asset portfolio and to raise their benchmark rate by a half percentage point. They are poised to follow with another half-point in June.
"We're going to be raising rates and getting expeditiously to levels that are more neutral, and then that are actually tightening policy if that turns out to be appropriate, once we get there," Mr. Powell said during a panel discussion last week.
Key to that strategy will be estimates of the neutral interest rate, a monetary nirvana that balances supply and demand when unemployment is low, the economy is growing steadily and inflation is stable around the Fed's 2% objective.
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https://www.foxbusiness.com/economy/the-fed-wants-raise-rates-quickly-may-not-know-where-stop
