The fed funds rate is still significantly lower than inflation when the relationship should be reversed – a risky situation for the federalreserve.
The last time the U.S. suffered a nasty bout of inflation, in the 1980s, the economic emergency was seen as so dire the Federal Reserve, then led by Paul Volcker, jacked up interest rates by as much as three percentage points.
Now, there's a similar gap between inflation and the federal funds rate, but the relationship is upside-down. The point is Fed officials aren't moving with anything close to the urgency seen in the Volcker era. That's a risk, some top economists say. Vincent Reinhart, a former Fed official who's now chief economist and macro strategist at BNY Mellon, says that it’s hard to understand how the Fed will bring inflation down if the fed funds rate remains negative throughout the year, as shown in the Fed’s own forecast.consumers see inflation running at 2.8% over a five-year horizon, the lowest in a year and down from 3.1% in June.admitted
But these measured calculations are a far cry from the swift, emergency action the Federal Reserve took to slash rates during the market crash of March 2020 because of the pandemic's expected economic impact, or during the financial crisis of 2008.According to the Taylor principle, the real interest rate should be raised “more than one-for-one” when inflation increases, but the rate is currently negative because it is lower than inflation.
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