Is the Fed Tightening Rates?

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The recent March Fed Funds hike was the first time the FOMC has raised rates twice in one three month period in over a decade. Several Fed Governors have noted that two or three more increases are probably warranted this year.  In a normal rate environment that would constitute the start of a tightening cycle-- the Fed Funds rate will be higher at the end of the year. But in economic terms a base rate of 1.5 percent in December, to take the likely scenario, would still be below PCE inflation which was  2.1 percent headline and 1.8 percent core in February. If the neutral interest rate is zero, as many currently assume, monetary policy will still be accommodative in December, if somewhat less so.

Is that the reason the Fed Governors are willing to raise rates on an economy in the eighth year of a tepid recovery with growth barely 2.0 percent. Does increasing interest rates below the neutral zone has a negligible economic effect? If so does it not follow that reducing them to below the neutral zone may have had no effect as well? 

Join us for an examination of the conundrums of Federal Reserve monetary policy.