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09 23 2015 | by Victor Xing | Central Banks

What are the factors that guide the Federal Reserve in adjusting monetary policy?

The Federal Reserve is focusing on a number of key economic indicators and foreign economic developments:

Labor market conditions (labor market slack)

  1. Part-time worker for economic reasons.  These are workers who are working part-time because they cannot find full-time jobs
  2. Long-term unemployed as a percentage of unemployed
    Long-term unemployed as a percentage of total unemployed
    Long-term unemployed as a percentage of total unemployed
  3. Average hourly earnings
    Average hourly earnings
    Average hourly earnings
  4. Labor force participation rate
    Labor force participation rate
    Labor force participation rate
  5. JOLTS indicators, such as quit rate, hire rate, and vacancy rate

Inflation and inflation expectations (including market-based measures of inflation expectations)

  1. PCE (Personal Consumption Expenditures – Chain-type Price Index)
    PCE and Core PCE - Federal Reserve's preferred measure of inflation
    PCE and Core PCE
  2. FED 5y5y forward inflation expectations
    Federal Reserve 5-year, 5-year forward breakevens
    5y5y forward breakevens

The FED is also focused on financial conditions.  Financial conditions can be defined as:the current state of financial variables that influence economic behavior and (thereby) the future state of the economy.  This is a fancy way of saying current interest rates, stock prices, dollar valuation, commodity prices influence the future state of the economy.

For example, tighter condition (higher rates, lower stock prices, stronger dollar, etc) will lower future growth.

Major banks offer their financial conditions indicators to clients, and they cannot be shared on the public domain.  However, it is very important to know that financial conditions is the transmission mechanism connecting FED policy and the real economy.

Foreign developments is a constant focus.  Slowdown in China and EM economics is a concern

In conclusion, there is not a single indicator that drives Federal Reserve’s policy decision.  Instead, the FOMC weights different variables and assess their impacts on future path of the U.S. economy, and they formulate policy with the objective of meeting their dual mandate.

Next article09 23 2015 | by Victor Xing | Central Banks

What is the Federal Reserve and what does it do?