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Past and Future Effects of the Recent Monetary Policy Tightening
Stefania D’Amico, senior economist and economic advisor, and Thomas B. King, senior economist and economic advisor
We estimate how much of the impact from the Fed’s current tightening cycle is yet to be felt in the U.S. economy in both absolute and relative terms. To do this, we use the model from D’Amico and King (2023), which explicitly incorporates economic expectations and allows for forward guidance. That model implies larger effects of monetary policy and faster policy transmission than other empirical models. We estimate that although the majority of the effects on output and inflation have already occurred, the policy tightening that has already been implemented will exert further restraint in the quarters ahead, amounting to downward pressure of about 3 percentage points on the level of real gross domestic product (GDP) and 2.5 percentage points on the Consumer Price Index (CPI) level. Tightening effects on the labor market manifest more slowly, so more than half the policy impact on total hours worked is yet to come. According to the model’s forecast, the policy tightening that’s already been done is sufficient to bring inflation back near the Fed’s target by the middle of 2024 while avoiding a recession.
Chicago Fed Letter delivers timely economic analysis of issues affecting the regional and national economy. Opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.
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