Why does the economy continue to rise even though the monetary policy is tightening?

In the current global economic situation, the monetary policy of the Federal Reserve has triggered unprecedented follow. Despite the historical high level of Intrerest Rate, the U.S. economy remains strong. This article will explore the importance of financial conditions on the economic impact and elucidate why the tightening monetary policy has not effectively suppressed the overheated economy. This article is derived from an article written by Alp Simsek, a finance professor at the Yale School of Management, and compiled and translated by PANews. (Background: Printing money to save the economy! China's Central Bank first announced in 14 years that next year's monetary policy will 'turn to loose' at the right time to cut reserves and interest rates) (Background supplement: December FOMC meeting minutes: The Fed is concerned that Trump's tariff policy will lead to inflation Rebound, and the pace of interest rate cuts will slow down) In the current global economic situation, the monetary policy of the Federal Reserve has received unprecedented follow. Despite the Intrerest Rate policy rising to a historical high, the U.S. economy remains strong, a phenomenon that seems to contradict the expectations of traditional economic theory. The continued hot job market and steady rise in the economy inevitably raise the question: why has the tightening monetary policy not been able to effectively suppress the overheated economy as before? The latest research indicates that this phenomenon is not a paradox, but rather a limitation of traditional analytical frameworks. By re-examining the impact of financial conditions on the economy, we can gain a deeper understanding of the actual transmission mechanism of monetary policy. The Federal Reserve has raised Intrerest Rate to historical levels, but the economy continues to rise. The current strong employment report is proof. Why has this situation arisen? According to our latest paper, it may be because we have followed the wrong indicators. Although the Intrerest Rate policy is very high, the actual financial environment is quite loose. The rise in the stock market and the tightening of credit spreads have effectively offset most of the Federal Reserve's tightening policy. Data shows that the FCI-G index designed by the Federal Reserve itself (a comprehensive financial variable to measure its impact on the rise of the economy) confirms this. Despite the long-term rise in Intrerest Rate and the strengthening of the U.S. dollar, the market's positive performance (mainly the prosperity of the stock market and the improvement of credit spreads) is stimulating the rise of the economy. The tightening monetary policy and the strong rise are not actually a paradox. Our research with Ricardo Caballero and @TCaravello shows that what is important for the economy is not the Intrerest Rate policy itself, but the broader financial conditions. Our analysis shows that when the financial environment is relaxed, even demand for noisy assets (emotions) can stimulate output and inflation, ultimately forcing the Intrerest Rate to rise. This is consistent with what we are seeing today. From a quantitative perspective, the research found that the impact of financial conditions on the fluctuation of economic output accounts for as much as 55%. In addition, the main transmission of monetary policy should be through the impact on financial conditions, rather than directly through Intrerest Rate. The current situation conforms to this framework: although the Intrerest Rate is high, loose financial conditions are supporting a strong rise and may prevent inflation from returning to the target level. Looking ahead, this indicates that the mission of the Federal Reserve is not yet complete. To achieve the 2% target, the financial environment may need to be tightened. This may be achieved through the following: market adjustments - strengthening of the U.S. dollar - further interest rate hikes. The path of Intrerest Rate will mainly depend on market dynamics. If the market adjusts and the U.S. dollar strengthens, the current level of Intrerest Rate may be sufficient. But if the financial environment remains loose, further interest rate hikes may be needed. This framework suggests that observers of the Federal Reserve should pay less attention to the debate about the 'terminal Intrerest Rate' and focus more on the evolution of financial conditions. This is where the real transmission of monetary policy occurs. Although our paper further proposes a clear FCI target, more importantly, we need to change the way we think and talk about monetary policy. The Intrerest Rate policy is just an input; financial conditions are what truly matters. Related reports: Trump is considering declaring a 'national economic emergency' to launch a new tariff policy, non-farm employment lower than expected strengthens confidence in interest rate cuts South Korea's new policy: gradually open enterprises, Financial Institution open named accounts to participate in Crypto Asset trading The number of bankruptcies in the United States has reached a new high since the financial crisis! Wall Street: the risk of economic recession may trigger a major pullback in U.S. stocks Thoughts: Why is monetary policy tightening, but the economy continues to rise? This article was first published on BlockTempo, the most influential Blockchain news media in the dynamic area.