Chart of the Week: 15 June 2018

By historic standards, U.S. monetary policy is still quite accommodative

In early June, the Fed raised its key policy rate for the 7th time in the current cycle, bringing the upper bound of the federal funds rate to 2%. How loose or tight is that? One way to answer this question is to take inflation rates into account. Doing so provides some interesting insights, especially on how today’s fed funds rate compares to previous cycles. Taking the core inflation rate, currently 2.2%, as a reference, we find that the real fed funds rate is still negative. Looking at the peak of previous tightening cycles, this measure used to be 5% in the late 1980s, 4% at the turn of the century, and 3% before the financial crisis. From this perspective, the rate hikes we have seen so far have been quite moderate. We note that as long as labor markets continue to tighten, the Fed will remain inclined to raise rates. However, if inflation remains near target, as we expect, they will not feel compelled to move too far or too fast.