The Fed's monetary policy has important implications for the bond, stock, and currency markets, and the economic cycle generally. In this report my goal is to track the data that I think Fed officials, and Chair Powell specifically, are most focused on based on ongoing public communications.


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 (Headline PCE YoY). 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, generally viewed as the unemployment rate that is consistent with low and stable inflation over the longer term- often estimated as the "natural rate of unemployment." The natural rate of unemployment comprises both the "frictional" unemployment of people who are temporarily between jobs or searching as they have reentered the labor force and the more "structural" unemployment of people whose skills or physical location are not a good match for the jobs available. In other words, the Fed aims to reduce "cyclical" unemployment. 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 4.2%, from Fed's 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., when 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, i.e., 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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The Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest riskswith the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Fund and to download a prospectus, please visit Investors should consider the investment objectives, risks and charges and expenses of the Merk Hard Currency Fund carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Fund's website at or calling 866-MERK FUND. Please read the prospectus carefully before you invest. The Fund primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Fund owns and the price of the Funds shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Fund is subject to interest rate risk which is the risk that debt securities in the Funds portfolio will decline in value because of increases in market interest rates. As a non-diversified fund, the Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Funds prospectus. The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard Currency Fund. Foreside Fund Services, LLC, distributor.

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