Nikkei Asia 08/Apr/2023 The U.S. Federal Reserve is faced with growing difficulties in managing monetary policy. If it keeps raising interest rates to contain inflation, that could further destabilize the nation's financial system. Yet the risk of inflation is real -- the country's "shadow rate," a gauge of overall monetary tightening, is still below 2%, far lower than the Fed's key policy rate of 4.75% to 5%.

The risk of inflation becomes clearer when the appropriate level of interest rates is calculated using the Taylor rule, which considers such factors as inflation and GDP gaps. It indicates an optimal federal funds rate of 7.8%. "In the overall economy, monetary conditions essentially remain accommodative," said Naokazu Koshimizu at Nomura. "The level of current interest rates are not enough to keep economic activities in check."