David Mericle, Research Analyst at Goldman Sachs, points out that as inflation continues to normalize and job growth remains hot, the Fed is increasingly facing accusations of being behind the curve. 

Key Quotes

“The Fed’s current policy stance is about 1pp easier than prescribed by a Taylor rule that uses a depressed neutral rate and about 3pp easier than a rule that uses a constant 2% neutral rate.  The implication that current policy is somewhat “too easy” is consistent with the fact that the FCI remains easier than average and is still delivering a positive growth impulse at a time when the Fed is trying to impose deceleration.”

“The Fed’s projections already imply a correction of the narrower policy gap estimate, and even the wider gap could probably be corrected with a modestly faster pace of hikes and manageable inflationary consequences.  Yet history counsels caution about falling behind.  In the mid-1960s, years of low and stable inflation gave way to a sudden spike as the Phillips curve proved much steeper at very low unemployment rates and the Fed struggled to overcome political pressure.”

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