Past and Future Effects of the Recent Monetary Policy Tightening

Abstract: The Federal Open Market Committee (FOMC) has raised short-term interest rates over 500 basis points since early last year, but it recently slowed the pace of policy tightening and some participants have signaled that the current tightening cycle might be nearing its end. In making the decision to stop raising rates, an important consideration will be the extent to which the actions already taken by the Committee have yet to feed through to the economy. On the one hand, if substantial effects of past policy tightening are yet to come, that would argue for an earlier end to rate increases, all else being equal. On the other hand, if we have already seen in the data the bulk of the policy tightening’s effects, the additional restraint that is yet to be realized might not be sufficient to meet the FOMC’s inflation goal; in this case, policymakers may see the need to take further action.

Keywords: Macroeconomics; lags of monetary policy; Forward guidance; Business cycle fluctuations; Monetary policy; Central banks;

JEL Classification: E32; E52; E58;

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Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Chicago Fed Letter

Publication Date: 2023-09

Volume: no 483

Pages: 6