His analysis is based primarily on the Taylor Rule. He concludes that the federal funds rate is just barely high enough: https://www.stlouisfed.org/publications/regional-economist/2023/june/is-monetary-policy-sufficiently-restrictive.

I recommend this piece. It refers to the paper he gave at the annual monetary Policy Conference at Hoover and Stanford last month. It shows that there is still uncertainty, and, in my view based on the Taylor Rule, there is still room to raise the federal funds rate, but of course much less that before the Fed began to adjust.

I referred to the book –“HOW MONETARY POLICY GOT BEHIND THE CURVE AND HOW TO GET BACK”–that has the proceedings of a conference we held a year ago, when the funds rate was only 25 basis points. The message of the conference was that the Fed was behind the curve. Well, a year later they have raised the funds rate, and they are much less behind the curve. The question now is “how to get back, and that will be the focus of our next conference.

Here is a video that contains the interview: https://www.bloomberg.com/news/videos/2023-02-15/-bloomberg-markets-the-close-02-14-2023 .

And we are just getting started: Last Wednesday at the Economic Policy Working Group (EPWG), Peter Henry talked about “The Global Infrastructure Gap: Potential, Perils, and a Framework for Distinction,” and next Wednesday Michael Bordo will speak about “Muddling Through or Tunneling Through: UK Monetary and Fiscal Exceptionalism During the Great Inflation,” and then  on February 15, 2023 Ellen McGrattan will speak about “On the Nature of Entrepreneurship,” and the following Wednesday Erik Hurst will talk about “The Distributional Impact of the Minimum Wage in the Short and Long Run”

The Working Group’s meetings are now on a virtual platform. As the article states: “the level of participation from policy makers and scholars across the nation and the world has grown substantially.” And we will have another big conference on May 12, 2023. It is so important to keep up the work.

I talked about how the Fed got into this difficult situation, and I hope that brought back memories of the 1970s where the critique was similar, but also different in important ways. All agreed a year ago that the Fed was behind the curve, and the question was when and how rapidly to get back on track. This was also the title of the Hoover Institution book entitled: “How Monetary Policy Got Behind the Curve — and How to Get Back,” published in May 2022, and edited by Michael Bordo, John Cochrane and John Taylor.

During the past year the Fed had indeed tried to get back on track, and it increased the federal funds rate from near zero to a bit over 4 percent. Some–including most of the speakers and participants–said that more was needed. The event again had many commentators and guests–including monetary experts such as Mervyn King, Andrew Levin, Bob Hall, and David Papell, who spoke out on this theme from different perspectives.

The whole Zoom event from January 4, 2023 was video-recorded, and can be found here: https://www.hoover.org/events/policy-seminar-john-cochrane-mickey-levy-kevin-warsh-and-john-taylor along with a list of participants and the slide presentations. It is fascinating to compare the session this year (Jan 2023) with the session last year (Jan 2022) which had the same group of speakers and many of the same participants: https://www.hoover.org/events/roundtable-economic-policy-john-cochrane-mickey-levy-kevin-warsh-and-john-taylor  It is most fascinating in my view because the theme is similar except that Fed has begun to catch up. How will the economy–and indeed the world economy–look in January 2024? That depends on the Fed and other central banks.

But the emphasis of the market commentary was not much on the benefits of credibility of monetary policy. Rather it was that the Fed will simply keep raising the federal funds rate until we really see inflation coming down.

Here it is important to think about history, with the perspective of 40 years. It is not easy. I attended the 1982 Jackson Hole Conference and gave a paper called “The Role of Expectations in the Choice of Monetary Policy,” which stressed the importance of expectations. https://web.stanford.edu/~johntayl/Onlinepaperscombinedbyyear/1982/The_Role_of_Expectations_in_the_Choice_of_Monetary_Policy.pdf.

The year 1982 was so much different than the year 2022. Inflation had been high for 15 years in 1982, not 15 months as today, and inflation had set in. The wage price spiral was in full bloom. It took a big change in monetary policy too bring inflation down, and that is what had happened. But today inflation is not so entrenched as it was in the 1970s when higher interest rates caused big recessions. An expectation of a credible disinflation policy will prevent pass through to wages and other prices. The emphasis should be on credibility and expectations, and on a clear understanding of how different policy and the economy have been recently compared with the 1960s and 1970s. Yes, the Fed has to adjust the interest rate some more to bring inflation down to levels consistent with the the 2 percent target. But a more credible Fed policy will make the adjustment much smoother and with the main impact on inflation, not on the real economy.