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To Reach the Fed’s Inflation Target, Interest Rates May Have to Remain Restrictive for Some Time

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Abstract

The Federal Reserve has raised the federal funds rate by 500 basis points since March 2022. But how tight is the current policy stance? We account for the federal funds rate, inflation expectations, and the natural rate of interest and find that monetary policy has only been restrictive since 2023:Q1. We find that to bring inflation down to 2 percent, the Federal Reserve may have to keep the federal funds rate in restrictive territory for some time.

Suggested Citation

  • Johannes Matschke & Sai Sattiraju, 2023. "To Reach the Fed’s Inflation Target, Interest Rates May Have to Remain Restrictive for Some Time," Economic Bulletin, Federal Reserve Bank of Kansas City, pages 1-4, June.
    • Handle: RePEc:fip:fedkeb:96406
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    References listed on IDEAS

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    1. Christina D. Romer & David H. Romer, 2023. "Presidential Address: Does Monetary Policy Matter? The Narrative Approach after 35 Years," American Economic Review, American Economic Association, vol. 113(6), pages 1395-1423, June.
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      Keywords

      federal funds; inflation; interest rates;
      All these keywords.

      JEL classification:

      • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
      • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
      • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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