FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., on March 19, 2019. REUTERS/Leah Millis/File Photo
By Michael S. Derby
NEW YORK (Reuters) – The current stance of U.S. monetary policy is now more aggressive than a slate of rules suggests is needed, according to a report released by the Cleveland Federal Reserve on Wednesday.
Based on the median of seven of these policy rules, the U.S. central bank’s benchmark overnight interest rate, or federal funds rate, should be at 4.38% in the current quarter, although the Cleveland Fed report noted that the suggested level could hit 7.7% under some scenarios. The federal funds rate is currently set in the 4.50%-4.75% range.
By the first quarter of next year, this mix of rules points to a 4.31% federal funds rate.
Monetary policy rules offer settings based on a mix of factors, frequently tied to things like inflation and the economy’s potential for growth. Many of them are variations of the Taylor Rule, named for its creator, Stanford University economics professor John Taylor.
Fed officials have long noted that while they take stock of monetary policy rules, they do not use them blindly, and that human judgment is essential to good monetary policy. In recent years, real-world monetary policy has often been more stimulative than the rules have called for.
But monetary policy is now in the somewhat unusual place of a more hawkish disposition, and the gap between what the rules call for and what the Fed will do is very likely to grow over time. At the Fed’s policy meeting in December, officials penciled in a 5.1% federal funds rate for this year. With inflation still too high relative to the central bank’s 2% target, policymakers are likely to revise that number even higher at their March 21-22 meeting.
Last month, New York Fed President John Williams said a year-end federal funds rate of between 5.00% and 5.50% looked reasonable to him. In comments on Wednesday, Minneapolis Fed President Neel Kashkari said the targeted rate may need to be higher than 5.40% this year.