It’s conventional to measure changes in the stance of monetary policy via interest rates. Because the Fed raised its target rate in March and is expected to raise it again soon, it is said to be at the start of a tightening cycle. But the convention can be unhelpful in thinking about monetary policy. What if the neutral interest rate is rising faster than the Fed’s target? In that case, monetary policy is effectively becoming looser.
A better way to think about it is that monetary policy is getting looser when the growth (or expected growth) of nominal spending is rising. We don’t currently have a good way of checking whether that’s happening — but as Scott Sumner points out, we have some reason to think it is. Looking at graphs like this one, it appears that money is still getting looser. The Fed should surprise the markets by raising rates faster than expected — and, maybe even more important, commit to tightening until spending comes back to its pre-Covid trend.