In measuring the stance of policy, it's common to look at the real federal funds rate—the nominal rate less a measure of the rate of inflation that is likely to prevail over the period ahead. For inflation, I have tended to use core PCE price inflation, that is, without the effects of food and energy prices...
Doing the math leaves us with a slightly negative real federal funds rate. Does this mean that policy is highly accommodative? Normally, a negative real funds rate would imply that the answer is "yes" because it is typically associated with low borrowing costs and easy credit terms—that is, easy overall financial conditions. But, as I discussed, overall financial conditions are probably more restrictive now than when the financial crisis struck a year ago, so the slightly negative real funds rate does not imply a highly accommodative policy stance. In other words, policy must be calibrated to push through the substantial headwinds the economy faces. While the economy did well in the second quarter, that strength, as I indicated, is likely to prove ephemeral. My forecast is for sluggish growth in the second half of this year, with substantial downside risks—especially emanating from the financial system.
Overall inflation over the past year has been unacceptably high. But, the prognosis going forward is favorable. Inflation expectations remain relatively well contained, reducing the chance that a wage-price spiral will develop. Moreover, if new lower commodity prices hold, even at today's high levels, we are likely to see improvements in overall and core consumer inflation coming through the pipeline soon.