Financial Conditions Aren’t Tight, But the Fed’s Still Cutting
Jerome Powell has argued that real interest rates make the Fed’s monetary policy restrictive. Some measures of financial conditions, however, suggest Fed policy is loose.
Photographer: Yuki Iwamura/BloombergThis article is for subscribers only.
With every passing day, there seems to be more and more evidence of irrational exuberance in US asset markets — and yet, the Federal Reserve is cutting interest rates.
Sure, Wednesday’s move was a a hawkish cut, based on revised forecasts and dissents. Still, the US central bank has now reduced the fed funds rates by a full percentage point in the last three meetings without any sign of recession on the horizon, and with inflation well above target and financial conditions about as loose as they have been in years.