By Ann Saphir
(Reuters) – U.S. monetary policy is tighter than the Federal Reserve’s policy rate suggests, according to research published Monday by the San Francisco Fed, with financial conditions by September 2022 reflecting the equivalent of a 5.25% policy rate.
The actual policy rate at the time was 3%-3.25%; even after last week’s increase, the Fed’s benchmark rate is in the 3.75%-4% range.
The higher proxy rate published in Monday’s issue of the San Francisco Fed’s Economic Letter incorporates a range of financial market variables, including mortgage rates and credit spreads, to reflect the impact of the Fed’s forward guidance and its ongoing balance sheet reduction.
“Accounting for the broader stance of policy and comparing the proxy rate to simple rules suggests U.S. monetary policy tightened sooner and more sharply than has been generally recognized,” the Letter said.
Fed policymakers have raised interest rates rapidly this year to try to slow the economy and bring down inflation that’s running at more than triple the Fed’s 2% target.
The new research could inform policymaker thinking around how much further they may need to go.
Fed Chair Jerome Powell said last week that while future rate hikes could come in smaller increments, the policy rate may end up higher than previously thought as central bankers push policy to be “sufficiently restrictive” to bring down inflation.
San Francisco Fed President Mary Daly has advocated slowing rate hikes so as not to overtighten policy and needlessly damage the labor market.
While the Fed’s actual policy rate is lower than what some widely referenced monetary policy rules, such as the Taylor rule, indicate is appropriate, “our proxy rate indicates that policy is tighter than most rules prescribe,” the San Francisco Fed researchers found.
(Reporting by Ann Saphir; Editing by Andrea Ricci)