Fed Chairman Jerome Powell says interest have to move closer to neutral and maybe beyond. What is that 'neutral 'rate? Closer to 5% than 2%.
With inflation surging higher than anyone expected, Fed Chairman Jerome Powell, has laid out a policy path where the Fed is going to move quickly to get its policy rate up to “to a more neutral level” of interest rates, and maybe higher if needed.
But that’s not the right measure for neutral, said Andrew Levin, an economics professor at Dartmouth College and a long-time Fed staffer, including a role as a special advisor on monetary policy strategy and communications to the Fed board between 2010 and 2012. He currently advises the central banks of Norway and Sweden and also is a visiting scholar at the International Monetary Fund.
It reads: “The central bank should raise the policy interest rate, over time, by more than one-for-one in response to a persistent increase in inflation and lower the policy rate more than one-for-one in response to a persistent decrease in inflation.” For example, if the inflation rate rises from 2% to 3% and the increase is not caused by temporary factors, the central bank should raise the policy rate by more than one percentage point.
“If Powell would communicate that on Wednesday, I think the markets will understand that probably the federal funds rate is going to have to go up to 4% or 5% by the end of the year,” he said. “We will be interested to hear how the FOMC is interpreting the appropriate nominal neutral rate in an environment where inflation is considerably above the Fed’s 2% target,” he added.
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