“On the road to Damascus”: “Normalizing” monetary policy

Road to Damascus

According to John Williams:

(Reuters) – After years of pulling out the stops to boost a stubbornly sluggish U.S. economy, the Federal Reserve is moving back to “normal” monetary policy, a top Fed official said on Thursday.

But the Fed’s super-easy monetary policy over the past five years has left the financial markets vulnerable, making the road to normalcy a tricky one to navigate, San Francisco Fed President John Williams said in remarks prepared for delivery to the Association of Trade and Forfaiting in the Americas.

“Financial market participants who are awash in liquidity may be ignoring or taking on outsize potential risks,” he said. Though narrow interest spreads for risky assets like junk bonds and leveraged loans do not pose a significant threat in the near term, he said, they must be monitored closely.

“Barring any major shocks, monetary policy is finally on the road to normal,” he said.

Still, “A real tightening of policy, which would mean raising the fed funds rate, is still a good way off,” he said.

It appears monetary policy is all about “baby sitting” the financial markets! But if the “super-easy-monetary-policy” has only allowed the economy to “choo-choo” along a low-level path, what will happen when monetary policy goes back to “normal”? And the common view that a “real tightening of policy” is synonymous with raising rates is a recipe for disaster!

One thought on ““On the road to Damascus”: “Normalizing” monetary policy

  1. Yes, monetary policy has been so “super-easy” in the USA that unit labor costs are now lower than in 2008. The PCE deflator is around 1 percent.

    What would have a tight policy looked like?

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