HLGE - Is This What Monetary Tightening Looks Like?
- In light of the December FOMC meeting minutes, we should expect modest increases in the federal funds target soon, with a reduction of the balance sheet following the increase in rates. The exact timing of balance sheet reduction is yet to be determined.
- The shift in tone reflects the responsibility of the committee to maintain the Federal Reserve’s dual mandate of promoting price stability and maximum employment.
- In evaluating whether the Fed should ease, tighten, or maintain the stance of monetary policy, we need to consider the rate of inflation relative to target, and the unemployment rate relative to the natural rate. We also must consider the impact of policy on investor expectations.
- To evaluate whether the Fed is meeting its objectives, we can simply take the difference between the observed rates of inflation and unemployment, and the desired rates of inflation and unemployment.
For further details see:
Is This What Monetary Tightening Looks Like?