Thread by @jasonfurman

I'm uncertain about the trajectory of inflation.

But even conditional on my inflation views, I'm even more uncertain about what exactly monetary policy should do. Nervous about overreacting but also nervous about being so far from a reasonable place now.

So just, well, nervous.

There are good reasons to think inflation will go down (shift to services, massive stimulus behind us, workers returning, global supply chains unsnarl, normalized endemic COVID). A number of these arguments are overstated, often in the same way, but collectively plausible.

There are also good reasons to think inflation will go up (tighter labor markets, higher inflation expectations, wage-price spiral, continued excess demand with accelerations Phillips curve, normalized endemic COVID). (Yes, normalized endemic COVID is on both lists.)

All in all, I give a bit more weight to the down arguments than the up ones but with trepidation. I've said inflation in the 3-4 percent range, more data and reflection would leave me. I'm tempted to raise that to 3.5-4.5 percent given more data and reflection.

What should the Fed do? I wish interest rates were much closer to neutral right now, like 2-3% on the FFR (depending on your view of neutral real & expected inflation). I can even see the argument for being at a very dovish Taylor rule of ~6%.

BUT, the idea of rapidly raising rates is scary. In November I called for three hikes in 2022. I held back in part because of fear of too abrupt a shift being destabilizing. I'm surprised about how much the Fed has shifted with financial markets by and large taking it in stride.

At this point raising rates by 150 bp or 175 bp (once per meeting possibly with a 50bp hike at the first one) is well within the bounds of reasonable IF I'm right about inflation and employment continues to improve.

But how about more?

I worry a lot that more would do precisely what the hikes are intended to avoid--which is to push the economy into recession. Raising rates by 2-3pp in a single year in a world of uncertain financial market reactions and monetary lags is terrifying.

But having monetary policy at an expansionary setting for the entire year--which is what the 6 or 7 hike scenario would mean--is also terrifying, especially with the lags in monetary policy.

Where does this leave me? Mostly I would love the Fed to have a better forecast for inflation that is not the product of wishful thinking about overstating all the reasons it will come down & ignoring the reasons it will go up. This has gotten much better but could still improve.

I have less strong feelings about what policies exactly they would do conditional on that forecast.

And note, they don't and won't decide/lock forecast now, some of this will get clearer as the year evolves.