We policymakers must ask whether liquidity conditions are obscuring signals from financial asset prices that we would otherwise use to gauge the performance of the real economy. 9 Liquidity conditions could, in theory, lead to lower-than-justified risk premiums that stimulate aggregate demand or otherwise generate excessive inflationary pressures.
Now let me explore what would cause us to raise the policy rate modestly above neutral levels. Global supply chain issues could be more persistent. In addition, we could get a stronger boost in consumer spending as COVID-19 restrictions ease and people spend more of the savings they accumulated during the pandemic than we currently expect.