People like to blame oil prices for causing inflation even though it is the other way around, with money supply growth causing inflation. This graph shows the relation between nominal oil prices, real oil prices and the normalized US CPI inflation rate. Very close correlation between oil prices and inflation. Two main exceptions: the increased demand from China post-WTO entry in Dec. 2001, up to the 2008 crash, and second, the sterilization of reserves through the Fed suddenly paying interest on reserves for the first time in history, from 2009-2015, after which the Fed finally began deregulating capital markets by letting the interest rate on reserves rise.

Keep in mind that the Ukrainian war started after US inflation was already at 7.95% in February 2022.

Why not use the real AS-AD model that is derived from Ramsey (1928)? Keynes would be proud.

Here is a SUERF Policy Brief draft to be published in September.

rdcu.be/d7wKW

Present value theory linking oil prices to money growth and inflation rates: The model presented here is a theoretical asset pricing model for oil prices from Gillman and Nakov (2009). It shows that the capital in the oil sector demands that the USD oil price follow changes in the discount factor which is the nominal interest rate. The model includes how the nominal interest rate can be written in terms of the inflation rate and also the money supply growth rate.

https://x.com/ProfMaxGillman/status/1813943540004901227

According to the WSJ today (Nick Timiraos, July 17, 2024), John Williams as President of the New York Fed and Vice Chair of the Federal Open Market Committee (FOMC) that decides US monetary policy, stated that the labor market’s current conditions (a slow, steady rise in the unemployment rate) and recent inflation rates are “getting us closer to a disinflationary trend that we’re looking for…These are positive signs. I would like to see more data to gain further confidence inflation is moving sustainably to our 2% goal.”

First of all, Williams is famous for his 2003 academic research paper that stated that the US economic growth rate was in a steady 60 year decline and that Zero market interest rates were justified for the indefinite future. [1] He repeated this mantra of low and ever-falling economic growth as recently as a 2017 journal article stating that this same thesis was true internationally amongst a host of other developed nations as well.[2] No growth forever was his theme and it was taken to justify indefinitely low to zero market interest rates even as inflation was positive, say around 2%. This meant negative real interest rates: a market rate of say zero minus an inflation rate of 2% gives a negative real interest rate (after inflation) of -2%. So Williams first justified Greenspan’s negative real rates after the 2001 terrorist attacks and recession, and again after the 2008 crash and right up to 2017. Williams is a PhD student of renown Professor John Taylor and both are leaders of the New Keynesian economic school of thought.

Yet in 2016, with Trump as President, and with him berating the Fed for financial repression, Yellen and then Powell raised interest rates until we finally had 11 months of positive real interest rates in 2018-2019, and a steadily rising economic growth rate. Output growth came in at 4% around that time. Clearly, ever-declining economic growth was a Keynesian Myth that proved false as soon as Trump got the Fed to deregulate capital markets by stopping the prohibition of a positive real interest rate. Trump jawboned the Fed into ending an effective prohibition on usury, that is earning a positive real interest rate in capital markets, and economic growth responded.

So Williams’s famous articles on the “secular decline” of the US and other countries was a blatant falsehood led by misleading data work combined with a standard New Keynesian (NK) model. On that, I have written at length to explain how Williams and coauthors twisted like a pretzel data with theory to tell a Larry Summers “secular stagnation” story, despite its obvious implausibility given the then-recent booming decades of the 1990s and 2000s.[3] You can look up Summers version on his blog.

Williams was wrong then. Williams is wrong now. And again it is to justify arbitrary Fed action. Williams is a professional acquaintance of mine and seemingly a genuinely wonderful person; incredibly decent and responsible. But marching to a tune of the Fed’s discretionary control over markets rather than letting laws of the US Congress, which regulates the Fed, dictate Fed actions.

Why is Williams wrong again? The Fed has no authority to set the inflation target by itself according to statutory law of the 1978 Full Employment and Balanced Growth Act signed by President Carter that set a 3% inflation target by 1983, and 0% from 1988 onwards. Those targets can only be changed, according to the statute, by the President or by Congress, and not by the Fed. Yet in 2012 the Fed issued a statement, which I have written about at length.[4] In January of 2012, they stated:

“The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate (Board of Governors of the Federal Reserve System 2012).”

Fine; so they violated statutory law. Nobody but me seems to care. Although even Paul Volcker wrote in his last book shortly before his passing that a 2% inflation rate was not in any book that he knew of: [5]

“I puzzle at the rationale…A 2 percent target, or limit, was not in my textbook years ago. I know of no theoretical justification.”

However in the exact same 2012 statement the Fed stated that monetary policy will not consider labor markets, which also violates the 4% unemployment rate target that the same 1978 Act cited above set in law:

“The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment.”

Therefore, one could say that the Fed declared despite the 1978 Act that labor markets do not matter for Fed policy. Yet according to the WSJ, Williams implies that unemployment affects inflation. Williams is trying to keep interest rates high, despite what some on the FOMC would like, with an average real interest rate of about 2% for the last year, after 20 years of negative real interest rates that his New Keynesian models were used to justify. What model is Williams using now? That GDP growth cannot rise back up towards a sustained 2-3% that has been enjoyed in the US post-WWII period? No. Now, the secular stagnation NK theory that put Williams in the Fed drivers’ seat is past history and fully discredited by the facts of real GDP output growth being strong and resilient.

Instead, I guess Williams just likes to stick to his guns that no rates would be cut until September, even if real estate markets are crashing with distress as they are now.

From overly negative real interest rates based on NK theory to overly positive real rates based on no theory, I guess Williams’ Fed just likes to control market interest rates, just for the sake of control. Rather than letting markets determine real rates, the Fed seems to enjoy their newfound post-2008 ability to set market rates through the interest paid on bank reserves held at the Fed.

What is the Nobel prize (2004) accepted theory that determines market-based real interest rates: Real business cycle theory. During booms real rates rise to the 2-3% level in the 3-month Treasury market and during recessions these real rates fall down close to zero, but rarely ever are negative. Unless of course, the Fed sets by diktat market rates and drives them down to negative levels or keeps them at overly positive levels.

Why does the Fed do this? They were embarrassed by the high inflation episode we just experienced that they said was just going to be a blip, not an episode. It was a serious episode, in fact.

There are over $3 trillion in excess reserves sitting at the Fed and the Fed is terrified that banks will lend out this reserve money, over which the Fed has no control. Because, as the Fed knows, what causes inflation is not labor markets or oil prices or supply-chains; it is the growth rate of money supply that enters circulation that causes inflation.

The Fed cannot control the Frankenstein “ocean of reserves” that the Fed has induced to get non-FDIC insured banks to self-insure, to avoid another uninsured investment bank collapse as in 2008 that drove Fed reserves to negative levels: they ran out of money, a good joke for late night TV for economists.

The Fed does not want to lower interest rates because they do not know how much of the reserves will be lent out and cause higher inflation. There is no other possible reason unless they simply enjoy inflicting pain on the economy, or is it that they enjoy enrichening the investment banks holding the trillions of reserve dollars?

Renown professor John Cochrane wrote recently in the WSJ that the Fed’s ocean of reserves is good policy and paying interest on reserves is good policy. In other words, self-insurance by non-insured banks is better than government bank insurance policy that for example ended the Great Depression in March 1933 through the establishment of the Federal Deposit Insurance Corporation (FDIC, at first on a temporary basis, later permanent). Cochrane’s idea, and many other famous economists from Charles Goodhart to Thomas Hoenig, is that self-insurance is better than a good government bank insurance policy based on risk-based premiums as in private insurance markets and as in the FDIC scheme (Congress made the FDIC premiums risk-based by a 2006 Act). And this idea/argument is despite Bagehot’s (1873) famous treatise that relatively efficient bank insurance led England to be the center of global capital markets because the Bank of England pooled together private bank reserves and lent them out during bank runs as needed, so that less reserves were being held overall in the entire banking system as a result of the pooling. This is the opposite of self-insurance (as Bagehot described was the case for France at the time); it allowed more capital to circulate; and it made wealth accumulate more quickly.

The Fed in contrast cannot pool together the trillions in reserves held at the Fed because the Fed does not own any of those reserves. The Bank of England had reserves given to it willingly without any interest paid to them; the Bank could pool them to stem panics; and the Bank of England earned seigniorage as inflation tax revenue that financed its earnings. The Fed cannot pool the reserves; the Fed cannot use them to stem a bank panic; the Fed pays for banks to give it reserves; and the Fed no longer transfers its inflation tax revenue only to the US Treasury but instead since 2008 to private banks, arguably in violation of the Congressional Budget and Impoundment Control Act of 1974 and the Federal Credit Reform Act of 1990. All said, the Fed’s bank insurance scheme has turned Bagehot into Frankenstein.

But then what happens to such “good bank insurance policy” if it allows the Fed to control the exact level of real interest rates rather than letting markets do it? What happens to such good policy if it directs all of the US inflation tax seigniorage to private banks holding the reserves rather than to the US Treasury for revenue to finance Treasury spending? What happens to such good policy if it makes the Fed unable to control the inflation rate since they no longer control the rate of growth of money in circulation that determines the inflation rate?

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[1] Laubach, T., & Williams, J. C. (2003). Measuring the natural rate of interest. Review of Economics and Statistics, 85(4), 1063–1070. https://doi.org/10.1162/003465303772815934

[2] Holston, K., Laubach, T., & Williams, J. C. (2017). Measuring the natural rate of interest: International trends and determinants. Journal of International Economics, 108(Suppl. 1), S59–S75. https://doi.org/10.1016/j.jinteco.2017.01.004

[3] “Lucas’s Methodological Divide in Inflation Theory: A Student’s Journey”, by M. Gillman, 2022, Journal of Economic Methodology, Volume: 29, Issue 1, January, pages 30 – 47. DOI:10.1080/1350178X.2021.2019818

[4] “The Welfare Cost of Inflation with Banking Time”, 2020, Max Gillman, BE Press Journal of Macroeconomics; Advances; De Gruyter, volume 20, Issue 1, January, pp. 1-20; DOI: 10.1515/bejm-2018-0059;

and Gillman, Max, The Spectre of Inflation, Agenda Publishing, UK, December 2022; Columbia University Press, US, Feb. 2023. https://www.agendapub.com/page/detail/the-spectre-of-price-inflation/?k=9781788212366; and https://cup.columbia.edu/book/the-spectre-of-price-inflation/9781788212373.

[5] Paul Volcker, Keeping at it: The Quest for Sound Money and Good Government (2018).

As the Federal Reserve System sits on an Interest rate on Reserve Balances (IORB) of 5.4% that they set by dictate each time they meet for “monetary policy” decisions, the 3-month Treasury bill rate continues to follow it nearly identically. This is true even though the IORB is the rate the Fed began paying in 2008 for all reserves held at the Fed, which was first called the Interest on Excess Reserves (IOER). It became instead the “IORB” once the Fed dropped reserve requirements in 2020, since excess reserves had swooned to $4 trillion. All, despite the fact that the original 2006 Financial Services Regulatory Relief Act was passed to allow the Fed to pay interest to private banks only for the required reserves held at the Fed, not all reserves. (The idea was to level the playing field between small and large banks, since small banks had more reserves per deposits than large banks. Now large banks dominate the receipt of IORB payments).

Since the 3-month T-bill follows the IORB, let’s just use the IORB and see what the real interest rates are. The real rate is the residual of the market rate minus the inflation rate: what you get in interest after inflation when you lend capital.

The IORB rose above the inflation rate for the first time since Trump was President in April 2023 and has stayed above continually now for over a year. For this period from April 2023 to May 2024, the IORB averaged 5.31%, the inflation rate averaged 3.49%, and the real interest rate was by this measure 1.82%. This is after having a negative real T-bill interest rate for nearly every month from 2001 to 2023; there were about 3 years of positive real T-bill interest rates in these 22 years and 19 of negative real interest rates.

For the last 12 months, the IORB has averaged 5.36% and the inflation rate 3.32%, giving an average positive real interest rate of 2.04%, again after nearly 20 years of negative real interest rates.

The Fed’s abrupt change in policy rates, from driving the real rate negative for two decades to imposing a 2% real rate for the last year, can hugely distort markets. Now we see this Nowhere Man Fed policy driving the real estate market into distress. We finally have a run on real estate holdings after Starwood Capital Group capped withdrawals from its fund. Real estate investment trusts (REITS) as an industry whole face an amount of withdrawals that dwarf the amount of new deposits. This is how a run takes place in markets.

The Fed insists inflation is not low enough to cut rates, when all that matters is what the real interest rate is since this determines the cost of capital. Sitting in their Nowhere Land in Washington D.C., the markets are beginning to implode in the Everywhere Land of global capital markets.

Last time I wrote how the last 6 months of CPI inflation at rates in the 3% range made shot the real interest rate up to over 2% for the entire period. Why? Because after almost a quarter of a century of the Fed pushing the real interest rate below zero (with 2006-2007, and a year over 2018-19 as the 3 years of exceptions), now the Fed is by declaration (of its “interest rate on reserve balances IORB”) causing a too high real interest rate designed in markets only for the best of times.

Inflation in December 2024 was 3.3%, making the average over the 7 months from June 2023-December 2023 exactly 3.3%. In contrast, the “IORB” has averaged 5.37%, set at 5.4% for the last 6 months to December. Well, the real interest rate is the market rate discounted for inflation, which means that you subtract the inflation rate from the market rate. This is an “implied” rate, while the market rate and inflation rate are known variables. We attribute this as the Fisher equation of interest rates from his 1896 PhD thesis, deriving the “real” rate of interest after accounting for inflation.

So 5.37% minus 3.3% is a real rate of 2.4%. Quite above 2%. Throughout postwar US history, we have  had such high rates only during boom periods of the 1960s, 1980s, 1990s. The inflation rate averaged 6.6% from April 2021 to May 2023, not a good time for the economy, and not a time when we would want to follow up with suddenly high real interest rates. Now, do not mistake me for saying that a “normal” 2% real rate is bad; no, it can be good in good times and is expected in good times. But a Fed-enforced period of MINUS 1.9% (-1.9%) on average from the month after the 9/11 terrorist attacks to May 2023 (Oct 2001-May 2023) means the Fed has “prohibited usury” or a positive return on capital of the most liquid asset in the world: the 3-month Treasury bill yield, since the Fed set rates determine almost exactly the T-bill rate (see graph below).

Suddenly going from a regime of 22 years of an average -2% real rate to 7 months now through the end of 2023 at +2% is a shock to capital markets that endangers global financial markets. The Fed started the negative interest rate policy to “safeguard” global finance. Prolonging it for a quarter of a century, almost, gravely endangers global financial markets.

The Fed should immediately lower their dictated IORB market rate so that the T-bill rate will fall and real interest rates will realign a bit more towards normalcy.

Once cannot pretend that after -2% real rates for decades, it is “normal” to suddenly dictate +2% real rates for more than half a year. Shock therapy went out with lobotomies.

The Graph shows the real rate in the thin grey line, the inflation rate in the black line, and the IORB rate in the red line along with the Tbill rate in the blue line

(for more, see my book The Spectre of Price Inflation on Amazon; https://www.amazon.com/Spectre-Price-Inflation-Max-Gillman/dp/1788212371 )

The Federal Reserve must start to lower the nominal interest rate since inflation is now at 3% and the real market rate of interest is sufficiently positive after two decades of negative real interest rates through “persistent liquidity” injections by the Fed that have led to over $4 trillion in reserves sitting at the Fed, as the Fed pays banks not to lend out money. This is the definition of moral hazard in monetary policy.

Wicksell (1898) in Interest and Prices wrote about a natural rate of interest as being the market value that exists in the absence of central bank interference with the rate. That interference would traditionally be done, Wicksell wrote, by increasing or decreasing the supply of money faster or slower than the economy’s demand for money in order to lower or raise interest rates temporarily as a “liquidity effect.” Wicksell wrote that this could even be a “persistent liquidity effect” if the central bank for example kept increasing the money supply (by buying Treasury debt) at an increased rate for a sustained period of time, which the Fed has done over the last two decades.

Then came Woodford (2003) writing a book called Interest and Prices, again, even though he ingeniously miscontrues the money message of Wicksell. Woodford allows money to be used only for reserves in this early chapter and then eliminates money from the rest of the book. Wicksell in contrast was focused on the natural movements of capital markets over the business cycle and how the real rate of interest naturally fluctuates with the expansion and contraction of credit. Wicksell made clear what was monetary interference by the central bank, while Woodford champions the idea that the central bank can set the interest rate at any level it wants without regard for the central bank money supply.

There is no government budget constraint with money in any standard New Keynesian model. Gali’s (2008) cookbook distillation of the NK Woodford world uses money in the utility function in his lead-in chapter about why we do not want money in the model. His model’s equilibrium conditions are flawed by the fact that there is money in the economy, but no way in which the money enters the economy since there is no government budget constraint in which government expenditure is financed in part by printing money (buying Treasury debt). Gali justifies leaving money out by using an incomplete model in which the log utility specification gives money no role in the economy except to affect utility. There is no inflation tax in Gali or ANY NK model.

Laubach and Williams (2003) and their international follow-up with Holston is supposed to measure some constant that they call the natural rate of interest using the Gali 3-equation model. They estimate the Phillips curve there by very carefully picking a data period in which the inflation – output-growth relation is positive. They do this by including the 1960-1969 Phillips curve era of the Vietnam wartime build-up in which government spending and money printing were so high as to break down the Bretton Woods gold standard. Naturally in war inflation and output growth move together positively. In fact, and despite the sharply documented monetary phenomenon of that War, a Review of Economic Dynamics article explains the Vietnam War inflation as a long monopoly mark-up shock and like Woodford, Gali and Laubach and Williams omits money from the model.

We know that money supply printing through the Fed buying Treasury debt during war, pandemics, or as in every crisis in every country historically typically causes inflation. For example, see the nice article in the 2023 STL Fed Review by Kevin L. Kliesen and David C. Wheelock “The COVID-19 Pandemic and Inflation: Lessons from Major US Wars.” All NK models from Woodford to Gali to Laubach and Williams leave out money and the inflation tax used to finance government expenditure. That is a fact and that is why NK people do not like to use the cash-in-advance (CIA) economy in which inflation is always a tax. In a CIA economy, by adding exchange credit to avoid the tax, you get a downward sloping money demand per unit of consumption and a realistic view in the model about how inflation effects the economy negatively. Add in endogenous growth and the inflation tax lowers the output growth rate, which was emphasized by the originator of the NK 3-equation model, in Kenneth N. Kuttner’s Estimating potential output as a latent variable (JBES 12:361-368, 1994). The same year Kuttner also produced in Sbordone & Kuttner, 1994, “Does inflation reduce productivity?, Chicago Fed Economic Perspective, about how inflation and productivity move opposite of each other in both trend and cycle. And we know well that productivity is very procyclic and the very definition of the business cycle through Ed Prescott and Fynn Kydland’s ever-lasting work on real business cycles that has yet to be overturned in any way. Here is the 1994 graph:

Inflation therefore moves opposite of output growth in the work of the founder of the NK 3-equation model, all the way back in 1994, although there may have been earlier such contributions of which I am unaware.

The Laubach and Williams natural rate is a fantasy of an econometric estimation of a Phillips curve that existed because inflation results from money printing during wars. Phillips curves also exist after financial deregulation, which I call a bounce-back Phillips, and during every recession almost without fail. These Recession Phillips curves are of course Irving Fisher’s debt-deflation curves that show how when private bank money contracts during recessions as investments and loans drop, the inflation rate is pressured downwards. While the wartime or Covid build-up Phillips curves are caused by government money printing, the recession Phillips are caused by private bank money relative contraction.

During these business cycles the “natural” real rate of interest rises and falls. If the central bank did not intervene in markets at all, in Wicksellian terms, you would see the real rate of interest almost always being above zero and fluctuating up with expansions and down with contractions. Mind you the real rate was positive 10% during the Great Depression, which those advocating zero market interest rates seem to ignore, from Keynes onwards.

Now we live in a world where the Fed as in Woodford actually sets the market interest rate by diktat regardless of the money supply growth rate. They have made the surreal world of Taylor’s rule of the NK fiction in which monetary policy is setting the interest rate come true: Stranger than fiction but the Fiction becomes the absurd fantasia reality.

What matters is the real rate of interest that occurs naturally in capital markets over the business cycle. It is not a constant. It rises with productivity, which is why the interest rate is the marginal product of capital in our models (though NK models typically omit capital as in Laubach and Williams). This real world is the world of Ed and Fynn in which we actually labor.

The Fed now must decide how to set interest rates and that is what we call monetary policy. Wicksell called monetary policy how you set the government money supply growth rate. So do the Cash-In-Advance monetary models. So does anyone without a vested interest in the fictional world of the NK industry in which there exists zero money and inflation ALWAYS is from a monopoly mark-up shock. Right.

Actually monetary policy is supplying money. That is the only thing a central bank has the legal right to do. The Fed sets the Interest on Reserve Balances by violating the intent of the 2006 Financial Services Regulatory Relief Act (FSRRA) designed to pay interest only on (Woodford’s) required reserves. See Mark Guzman’s (Reading U, UK) work on the Fed paying interest on required reserves. The US moved the 2006 FSRRA’s starting date from 2011 up to 2008 during the Fed’s run on reserves in 2008, and then the Fed starting paying interest on ALL reserves instead of the intended required reserves only that was designed so as to not tax small banks by more than big banks. Well, now the big banks have hugely gained over the small banks because they get paid the interest rate of 5.2% on the $4 trillion in reserves at the Fed. The Fed turned the Congressional writers of the 2006 FSRRA on their heads and must have laughed at their own wit in increasing their power along with the transfer of seigniorage to the private banks instead of the US Treasury. This is why the Fed is running into budget problems: the interest paid on reserves.

We should lobby: STOP INTEREST ON RESERVES for a bumper sticker. Or RETURN THE INFLATION TAX TO THE TREASURY, which probably would not fit on a bumper sticker. Or: FED: SET MONEY NOT INTEREST RATES. Any of these would return the natural rate of interest to the normal one that fluctuates over the business cycle at a positive rate.

Especially, this would work if the Fed would respect the statutory law of the 1978 Full Employment and Balanced Growth Act that sets the inflation rate target legally at zero percent in 2023.

The Federal Reserve increase in interest rates to the 5.25-5.5% level in July 2023 was unnecessary and unwise. Inflation is now falling and will continue to fall. Having come in at 3% in June, the real rate of interest is now more than 2% and rising. This is after having been negative for many years.

The Federal Reserve Economic Data graph that I constructed here shows the real interest rate in black, it being equal to the market rate minus the inflation rate.

The real rate fell to a low of minus 8% in March 2022. It has been negative for 12 of the last 13 years ending in 2022, as the graph shows. Now at more than 2% and rising quickly as inflation falls, the Fed needs to stop raising rates and begin a gradual decline.

None of this control of interest rates by the Fed would be necessary if the Fed stopped paying interest on reserves. Reserves owned by private banks but held at the Fed because the Fed pays interest on reserves were $3.3 trillion in June 2023. The Fed is paying banks to not lend out money, to not intermediate savings into investment, and to decrease economic growth. Why? Supposedly for banking insurance policy. But the Fed cannot use any of these funds for any bailout since the Fed does not own them.

Stopping the payment of interest on reserves, which was authorized during the banking crisis of 2008 through the The Emergency Economic Stabilization Act (EESA) of 2008. All excess reserves had been zero (or as close as was feasibly possible) before 2008, with only about 1% of deposits held as required reserves coming into 2008. Essentially 1% of deposits held as reserves meant close to zero required reserves and zero excess reserves. The Fed was in a bind with the 2008 investment bank crisis, hit negative reserves without counting their borrowing through swaps, and instituted the policy of paying interest on reserves. This is a pure diversion of the inflation tax seigniorage from the US Treasury to private banks: a subsidy on the scale of billions of dollars that grows each time the interest rate rises and these reserves stay the same.

The bigger problem is that it disconnects the monetary policy of the Fed buying Treasury debt to finance the government spending through money supply increases from the market interest rates. The two are now set separately. The money supply does not automatically enter circulation. Part of it goes into these excess reserves held at the Fed. Therefore the interest rates are no longer market determined. The money supply entrance into markets and into inflation pressure is no longer known or determined by the Fed. What enters into circulation from reserves is determined by private banks. So the Fed money supply policy is determined in part by private banks, who get paid to keep the money sterilized but can renege on this deal at any time and lend out the reserves so that the money enters circulation.

With the Fed by diktat setting market interest rates, it is now setting them too high since inflation is falling fast.