Fed Governor Olson: Fed Unlikely to Tighten Rates Too Much

Federal Reserve governor Olson gave a speech today on rural development. After the speech, he said he wasn't worried about over tightening:

Olson Isn't Worried the Fed Will Raise Rates Too Much, Bloomberg: Federal Reserve Governor Mark Olson said he isn't concerned the Fed will raise its benchmark interest rate too much because the central bank can respond quickly to changes in the economy. ''I don't worry about that,'' Olson ... told reporters after a speech in Sioux Falls, South Dakota. ''The economy doesn't typically move so rapidly that it would get away from us.'' ... Olson said the Fed has ''an opportunity to look at the economy continually,'' including between policy meetings, and because of that ''we have the ability to respond very quickly.'' ... Olson said that price measure, also known as ''core'' inflation, ''remains muted.'' ''We need to be continually watchful,'' he told reporters. Olson... said the decision facing Fed policy makers at next week's meeting is the extent to which higher prices are ''passing through into core inflation, and the extent to which we may consider removing that accommodation,'' or continuing to raise the benchmark interest rate. ...

It sounds more and more as though Federal Reserve members believe that inflation is coming under control and they are waiting for confirmation of this from new data over the next few months before stopping the campaign of incremental rate hikes. But any signs of inflation will be met with hawkish eyes.

I want to question one thing in these remarks. There are considerable lags between the time a policy is put into place and the time the policy takes effect, e.g. as long as a year and a half before the peak impact of the policy is felt on GDP and the effects of policy shocks can persit for as long as three years. Recessions can occur much faster than this and the idea that the Fed can always respond in time to catch any downward movement in activity fails to recognize the length of these lags and the uncertainty we have about them (see Jim Hamilton at econbrowser for more on this). I find the attitude that 'The economy doesn't typically move so rapidly that it would get away from us,'' surprising from a Fed official.

Comments

[Spectator]

OK, so the Fed tightening can take a while to show up in the economy. Makes it hard to tell when they've tightened too much.

How come nobody asks what if they loosen too much and it takes a while to show up? Could it it result in easy money going into unproductive spending and debt binges. (And don't tell me rising home values is productive.)

At least none of the Keynesians seem to ask. Could this be a "print-money bias" in the financial industry which is clearly drinking from the hose of easy money.

[CJ]

"How come nobody asks what if they loosen too much and it takes a while to show up?"

Because that was the issue several years ago when the Fed policy was loosening.

The lag is real... The tightening was implemented on the heels of very accomodative policy, creating an overlay to the runoff of the previously looser policy. Because of the lag, the tight policy effect is yet to be felt.

[CJ]

The Fed is operating with a long lag on the impact of their "medicine" and could very easily overdose the patient (as they almost always have). I find it shocking that a Fed govenor could be so cavalier about the implications of this policy lag.

[calmo]

I find the attitude that 'The economy doesn't typically move so rapidly that it would get away from us,'' surprising from a Fed official.
I get this picture of a rotund nearly retired gent taking a few steps in a hopeless effort to catch something. (His next breath maybe.)
[We don't expect him to say that he's slow or incompetent, no?]
I think I share this CJ view:
Because of the lag, the tight policy effect is yet to be felt.
Despite those 12 baby steps, during which time more credit has been issued, there has been no tightening. The house has served this purpose and I think that is the focus of their concern: capture the house inflation to regain the money supply. The trick, highly improbable IMO, is to contain it without shuttin it and the economy down. So the month to month housing prices and volumes seem central and the core CPI, an academic exercise. If housing weren't so dominating a feature I might think otherwise.
To return to that quote:

'The economy doesn't typically move so rapidly that it would get away from us,''
Housing has gotten away from them for several years and they are hoping to gradually creep up on it.
No rapidity needed or desired apparently.