A rate hike roadmap

Now that a QE taper announcement is more or less baked-in for this year, the next question is when the Fed will raise rates. The July FOMC minutes highlighted the point that the criteria for a taper decision is entirely different from that for a rate hike.

Several participants emphasized that an announcement of a reduction in the Committee's pace of asset purchases should not be interpreted as the beginning of a predetermined course for raising the federal funds rate from its current level. Those participants stressed that the Committee's assessment regarding the appropriate timing of an increase in the target range for the federal funds rate was separate from its current deliberations on asset purchases and would be subject to the higher standard, as laid out in the Committee's outcome-based guidance on the federal funds rate. 

While the rate hike decision process can be analyzed in terms of the Fed's Flexible Average Inflation Targeting (FAIT) framework, it also depends on the Powell Fed's newfound focus on inequality and employment. How does the Fed define full employment? In particular, a comparison of the US prime-age employment to population (EPOP) to Canada's is a laboratory in monetary and government policies in light of the similarities in age (though not race) demographics. Canadian prime-age EPOP has been higher than the US in the last two expansion cycles and it recovered faster from the pandemic when compared to each country's respective 2019 peaks.

All of these questions are important considerations for the analysis of Federal Reserve monetary policy.

The full post can be found here.