Simple monetary policy rules call for much higher rates, but they may be less applicable in today's unusual circumstances, the Fed says.
Simple monetary policy rules called for a fed funds rate in the 4% to 7% range in the first quarter of 2022 and have risen since then as inflation climbed, the Federal Reserve said in its report to Congress on Friday ahead of Chair Jerome Powell's semiannual testimony next week.
The Fed also cautioned that the usefulness of these rules are "limited in unusual economic circumstances" and don't take into account the effect of balance sheet tightening.
"The recent elevated inflation readings imply that the prescriptions for the federal funds rate of simple policy rules in the first quarter of 2022 are well above their pre-pandemic levels, at between 4% and 7%. Overall, the prescriptions of all simple rules have risen notably over the past few quarters as inflation readings climbed further above 2%," the Fed's Monetary Policy Report said.
Some lawmakers support legislation that would force the Fed to be accountable to such rules, though those efforts have not been successful.
The FOMC raised its fed funds rate target by an unusually large 75 bps on Wednesday to 1%-1.75% as CPI inflation soared to a fresh 40-year high.