Esther George, Speech: Energy and the Outlook for the Economy and Monetary Policy

Rates – How High: “While it is tempting to speculate on how high rates might need to go, the degree of tightening necessary will only be determined by observing the dynamics of the economy and inflation and cannot be predetermined by theory or pre-pandemic benchmarks … Some have argued that a minimum standard for a restrictive policy is a positive inflation-adjusted, or real, rate of interest. Currently, survey evidence indicates that consumers expect inflation to run at about 5 percent over the next year, above the current 3¾ to 4 percent target range for the policy interest rate, suggesting that the real interest rate remains negative. This measure would point to considerably higher rates than current levels.”

Rates – The Speed of Increases: “A more measured approached to rate increases may be particularly useful as policymakers judge the economy’s response to higher rates. Already, the Federal Open Market Committee’s policy actions have led to a sharp tightening of financial conditions. The yield on the 10-year Treasury bond has increased 260 basis points since January, the fastest increase in almost 40 years. Mortgage rates have more than doubled. The dollar has appreciated 10 percent against a wide range of currencies, and stock market indices have declined by about 20 precent. These are big moves in financial markets, seen previously in only the most extraordinary times.”

“The speed at which rates have increased has likely contributed to the marked increase in policy rate uncertainty, if only by widening the range of possible action. Uncertainty around the policy rate is currently very high, in part reflecting an unsettled outlook, but also importantly, uncertainty over the central bank’s reaction function. I expect some of the increase in uncertainty can be attributed to an aggressive front-loading strategy of policy tightening. As the tightening cycle continues, now is a particularly important time to avoid unduly contributing to financial market volatility, especially as volatility stresses market liquidity with the potential to complicate balance sheet run-off plans.”