“If a tree falls in the forest and no one around you can hear it, does it make a sound?” This is an ancient philosophical thought experiment. Now there's a monetary policy equivalent: if high interest rates don't significantly slow the economy, will they do anything to reduce inflation?
At present, it is unclear to what extent the Federal Reserve's high interest rate policy puts downward pressure on economic activity.This has raised serious questions about its ability to guide the economy and manage inflation：
1. There was no recession. This is contrary to the forecast when the Federal Reserve raised interest rates by more than 5 percentage points in 2022 and 2023. The unemployment rate has remained below 4% for 27 consecutive months.
2. Over the past year, GDP growth has been higher than the long-term trend, and even interest-sensitive residential investment has maintained positive growth over the past three quarters.
3. The US stock market is hitting a new high.
David Zervos, Jefferies' chief market strategist, said at the Atlanta Federal Reserve Financial Markets Conference on Tuesday morning:”The policy is not restrictive.Demand has not been crushed.”
“The main reason for inflation is almost unrelated to the demand cycle,” Zervos said.
“Throughout the economic cycle, the overall situation was a huge supply shock, followed by the lifting of the supply shock and some aggregate demand fixes,” he said.
In his view, given the Federal Reserve's trillion-dollar balance sheet,The Federal Reserve's rate hike was enough to shift its policy stance from “super-super-ultra-loose” to closer to neutral, that is, it neither stimulates nor slows the economy.
On the other hand, Atlanta Federal Reserve Chairman Raphael Bostic was asked why he believes the current interest rate policy is restrictive and how he views monetary policy transmission in the economy. “If you look at the most interest-rate sensitive sectors in the economy, they respond almost immediately,” Bostic said during a briefing with reporters during the conference.
Speaking to real estate industry contacts, he said, “Everyone says interest rates do have a significant impact on loan volume and transaction activity in every market.”
He added that business people told him that high interest rates are causing them to delay investing, which will “indicate that we are seeing economic activity being delayed in a manner consistent with the economic slowdown.”
Americans' reliance on fixed-rate mortgages (many homeowners locked in low interest rates in 2021) may have limited the impact of interest rate hikes on households.
Bostic acknowledged that due to these cheap loans, “their interest rate sensitivity today is lower than normal, but reduced sensitivity is not the same thing as no sensitivity.”