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Powell On The Policy Lags Timeline Over Coming Months

FED
  • Q: Could you tell us what the lags timeline looks like over the coming months/year?
  • A: Monetary policy works with long and variable lags and it works first on financial conditions, and then on economic activity, and perhaps later on inflation. That's been the thinking for a long time. There was an old literature that made those lags out to be fairly long. There's newer literature that says they're shorter.
  • The truth is we don't have a lot of data of inflation this high in what is now the modern economy. One big difference is that it used to be you would raise the federal funds rate, conditions would react and that would affect economic activity. Now, financial conditions react well before in expectation of monetary policy. That's the way it has moved for a quarter of a century, in the direction of financial conditions, then monetary policy. Because the markets are thinking what is the Central Bank going to do.
  • There are plenty of economists that also think that once financial conditions change that the effects on the economy are faster than they would have been before. We don't know that. I guess I would say it's highly uncertain. From a risk management perspective, it would be irresponsible to ignore them. You want to consider them but not take them literally. So I think it's a very difficult place to be.
  • But I would want to be looking carefully at what's actually happening with the economy and trying to make good decisions from a risk management standpoint remembering, of course, that if we were to overtighten, we could then use our tools strongly to support the economy.
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