Federal Open Market Committee - Another Headache for the Fed?

Consistent with its dual mission, the Federal Open Market Committee announced policy thresholds covering unemployment and inflation. Although the Fed has never achieved a clear long-term target unemployment rate, the threshold for unemployment (6.5%) always dominates inflation equivalent (2.5%). By contrast, FRB's long-term inflation target is 2%. According to the Evans rule, assuming that the threshold is higher than the target, the inflation rate may overshoot. By abolishing Evans rules and policy thresholds, it means that the inflation target of 2% is actually the upper limit.

The Federal Open Market Committee (FOMC) is the monetary policy decision body of the Federal Reserve System and manages the country's money supply. It consists of seven members of the Federal Reserve Board, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Fed Presidents who will replace to work for a year. The FOMC is held eight times a year, held as necessary, discussing the prospects of the national economy, and considering monetary policy options. The Federal Open Market Committee adjusted interest rate goals for nightly Federal funds to manage short-term interest rates based on the perception of economic power. When it wants to stimulate the economy, it will lower the target interest rate. Instead, it raises the interest rate of federal funds to slow the economy.

For a long time the market has suspected the determination that the Fed will normalize its monetary policy. The interest rate path implied by the market in the next 12 months is behind the trend indicated by the Federal Open Market Committee (FOMC) policy makers. The market is catching up now, and we think that this is showing a stable background for dangerous assets. Two additional rate increase pricing in 2018, we can see three inflation due to strong growth and moderate rise. However, between 2019 and 2020, the Fed is still leading the market. See the "Fed to the Fed" chart below.

The Federal Open Market Committee headed by Mr. Powell has changed the statement on raising interest rates in a way that removes the fundamentals of monetary policy in recent years. During the Bernanke era, the Federal Reserve used "forward guidance" to show the direction of future interest rates. But he also tried to change some of the central bank's practices to maintain high flexibility after 2019. By doubling the number of press conferences and eliminating foresightable guidelines on interest rates, Mr. Powell, if the way of economic development is different from what we currently expect, adjusts such as speeding up interest rate hikes You can speed up.

How does the FRB respond? Last December, the Federal Open Market Committee ended nearly zero interest rates in the US for seven years. Simon Porter, head of the Federal Reserve Bank of New York, said that a series of short-term "money markets" interest rates will rise according to policy intent as evidence of the introduction of a new "good control", higher interest rates I pointed out. Likewise, FRB insists on short-term solutions that will not be a long-term vision.