The current tightening cycle appears less aggressive when considering rate levels rather than changes. The real rate of around 1% is more than two percentage points below the average level of past cycles (Table 2). However, the neutral real rate—the rate consistent with long-run stability in growth and inflation—has fallen over time. Most Fed officials peg it at around 0.5% currently, compared with a long-run average of around 3% since 1961. As a result, the difference between real and neutral rates is somewhat higher today than the norm at this point in past cycles. Based on interest rates, the Fed would appear to be ahead of the game.
One area where the Fed has made little headway, however, is financial conditions. Tighter conditions usually work in tandem with higher interest rates to cool the economy. This is largely due to this year’s strong rally in equity markets, with the S&P 500 index unchanged from 15 months ago compared with big declines in many earlier cycles. - RBC
Comments