SF Fed, Report: Financial Market Conditions during Monetary Tightening

“Current increases in the federal funds rate are expected to reverse a historically large negative real funds rate gap at the beginning of the cycle. Successfully closing the real funds rate gap will hinge on substantially reducing the inflation rate. Relative to history, both the size and the speed of tightening in Treasury bonds and common stocks have been large in the current cycle, in part because of the large gap and the Federal Reserve’s forward guidance. While the rapid tightening of financial conditions is expected to slow the economy relatively quickly, historical experiences raise the possibility of even more tightening in financial conditions given the large real rate gap that needs to be closed.”