The Federal Reserve on Wednesday spelled out the factors that will determine how much longer it’ll keep its key interest rate near zero: as long as it sees “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.” This already is setting off an intense scrutiny of the Fed’s new dashboard, the gauges that it — and, as a result, the markets — will be watching closely now.
In a research note to clients, Goldman Sachs economists offer their list:
“What indicators should investors watch to judge whether these conditions remain in force? For resource utilization, the broadest measure is the overall “output gap” between actual and potential GDP — but in practice the unemployment rate may be more important as a measure of utilization. For inflation trends, core inflation — particularly the PCE measure used by the Fed in its forecasts — is most important. And for inflation expectations, Fed officials are probably looking at a range of measures, most importantly market-implied expectations of future inflation (i.e. the five-year, five-year forward TIPS spread) and longer-term household expectations (including the University of Michigan’s median five-to-ten-year measure).”
This feels slightly obvious to me. Are we announcing that markets are paying attention to the Fed now? That's funny, this week's FOMC announcement was the least exciting yet.
Let's have Goldman audit the Fed. A good auditor knows the industry, who better than the Goldman rats?
Read the rest via Jr Deputy Accountant.