Recognizing the uncertainty regarding these various forces and the interplay among them, I believe it important that the FOMC calibrate the return of policy to the equilibrium real rate so that the process is neither hasty nor overly attenuated. Clearly, incoming data and the implications for the outlook should play a particularly important role in policy determination at this juncture.
However, theory and practice both indicate that policy works with long and variable lags. Therefore, the actual stance of policy will have to approximate more closely the equilibrium real rate before the pool of underutilized resources is fully exhausted. Otherwise, we risk a buildup of inflationary pressures.