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Quantitative excuse

Pre pandemic, the Fed used to publish their estimate for long term neutral rate of interest, following model R-star (Laubach-Williams). The chart below, shows the updated version of the model. The real fed funds rate (fed funds - inflation) has been below the model predicted rate since the #gfc which can be interpreted as accommodative. Whenever it has been above the R-star rate, the economy has fall into a recession. If tomorrow the fed hikes rates by 25 bps or more, we will be crossing the long term rate and according to the model the fed follows, we will enter restrictive policy territory. In other words, the fed will have a quantitative, model-based excuse to stop hiking.


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Source: 3Fourteen research


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