Has the FED Fallen behind the Curve? Evidence from VAR models

- We ask whether the FED has riskily delayed the exit from its large monetary easing.
- We focus on the effects of monetary policy on US PCE core inflation.
- Monetary policy shocks are not pushing inflation much beyond its baseline.
- Scenario analysis shows that the FED's stance is in line with macroeconomic dynamics.
- PCE core inflation will likely lie below the FED's target in 2017.

We evaluate the role of US monetary policy in shaping inflation and economic activity by means of a medium-scale Bayesian VAR model, where the ZLB and the unconventional measures are addressed by using a shadow interest rate. The historical decomposition and a conditional forecast scenario show that the FED's stance is in line with GDP and inflation dynamics. Moreover, core inflation will likely lie below its target in 2017.