(Bloomberg) -- A San Francisco Fed study found that US monetary policy is likely much tighter than interest rates alone suggest, according to an updated calculation of a proxy measure that takes forward guidance and the balance sheet into account.
Financial conditions implied that the Fed’s benchmark policy rate was above 5.25% in September, compared with the actual target range of 3% to 3.25%, according to the analysis published Monday in the San Francisco Fed’s weekly economic letter.
“The proxy measure suggests that the stance of monetary policy has recently been substantially tighter than the federal funds rate alone would indicate,”wrote Jason Choi, Taeyoung Doh, Andrew Foerster, and Zinnia Martinez, the study’s authors.
Policy makers have raised interest rates by 3.75 percentage points so far this year, the fastest pace since the early 1980s, as they try to curb the highest inflation in 40 years. Officials delivered a fourth straight 75-basis-point hike last week, bringing the target for the federal funds benchmark rate to a range of 3.75% to 4%.
The authors’ calculation updates one from 2016 and takes into account the Fed’s balance-sheet reduction program and forward guidance on the path of policy.
Officials are shrinking their holdings of Treasuries and mortgage-backed securities at a $1.1 trillion annual pace and have repeatedly explained that they expect to keep raising rates to restore price stability. While the Fed only commenced rate hikes from levels near zero in March, their public comments on the need to tighten policy that began months before had already moved the proxy interest rate higher, the authors wrote.
Some Fed officials have begun expressing concern about the central bank potentially moving too quickly with interest-rate increases and risking tipping the economy into a recession by overtightening. When they raised rates last week, the Federal Open Market Committee’s statement explaining the decision said that officials would “take into account the cumulative tightening of monetary policy” and the fact that it acts with a lag.
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