The economy has handled the current rate hikes "exceptionally well" according to Joe Davis, chief global economist at Vanguard. He states, "Our conviction in a higher neutral rate is going up as every quarter of data comes in." If growth continues to be solid and inflation is stubborn the case for a rising neutral rate will strengthen. Consequently, the Fed may have less reason to cut rates.
However, some figures remain skeptical that the neutral rate is rising. Some believe the economy's resilience means the market is not sensitive to interest rates right now. Jerome Powell states the economy's response to current rates could be explained by "idiosyncrasies of the pandemic." Last month he commented "It's not that the policy isn't restrictive and it's not responsive to rates. It's that we had this outside force temporarily affecting that." Further data will inform economists on the progression of the neutral rate.
https://www.wsj.com/economy/central-banking/why-high-interest-rates-could-be-here-for-the-long-run-c6670448?mod=hp_lead_pos1
3 comments:
If the neutral rate is seeming to steadily be rising, I wonder if firm will raise their wages while keeping the same level of employment as a response. Would this reaction have any inflationary consequences? or will the look to layoff employees to raise wages?
do you think this indicates a rate cute in the near future?
With inflation staying high even through all the efforts take by the Fed I am curious to see when and how inflation approaches the target rate of 2% in the future.
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