Fed Chart Book

Fed’s Dual Mandate

Established Objectives of Federal Reserve Monetary Policy:

Stable Prices (“Price Stability”): 2 percent inflation rate as measured by the annual change in the price index for personal consumption expenditures (PCE). The Powell Fed views the core (excluding food and energy) PCE as a better indication of future inflation. It is worth noting that the Fed interprets the inflation objective as symmetric, meaning they are trying to prevent persistent deviations, either above or below, from their 2 percent inflation target.

Maximum Employment: The highest utilization of labor resources that is sustainable over time (often estimated as the “natural rate of unemployment” or the “non-accelerating inflation rate of unemployment” (NAIRU)). As Powell likes to point out, the unemployment rate that is consistent with maximum employment is largely determined by nonmonetary factors (i.e., not heavily influenced by Fed policy). The Fed has no fixed goal for this rate, the current longer run estimate for unemployment is 4.5%, from the March 2018 Fed Summary of Economic Projections

Fed Policy Tools

Federal Funds Rate: the primary policy tool of the Fed, it is the overnight benchmark interest rate. The Powell Fed aims for this rate to be at the estimated normal longer-run level when the policy objectives are met (i.e., inflation is running at the target rate of 2% and the economy is operating at maximum employment)

Fed Balance Sheet: Quantitative Easing (“QE”) is Fed balance sheet expansion via bond purchases using “printed money,” Quantitative Tightening (“QT”) is essentially the opposite: Fed balance sheet contraction via allowing bonds to mature without reinvesting the proceeds.

Forward Guidance: a commitment to hold rates at a certain level (e.g., zero) over a certain period of time

Fed Key Concepts

Data Dependency: The Fed describes its policy-making process as data dependent, which might be best summarized by Chair Powell’s words: “Our views about appropriate monetary policy in the months and years ahead will be informed by incoming economic data and the evolving outlook. If the outlook changes, so too will monetary policy.” Many of the following charts represent the relevant data followed by the Fed, and specifically by Chair Powell.

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