Financial Market Conditions during Monetary Tightening

Kwan, Simon H.; Liu, Louis

Journal Article

Financial Market Conditions during Monetary Tightening

Abstract: The current round of federal funds rate increases is expected to reverse a historically large gap between the real funds rate and the neutral rate at the beginning of the tightening cycle. Financial markets have reacted faster and more strongly than in past monetary tightening cycles, in part because of this large gap and the Federal Reserve’s forward guidance. Historical experiences suggest financial conditions could tighten even more given the size of the gap.

Keywords: financial markets; federal funds rates; forward guidance; Monetary policy tightening;