This is an excerpt from a very long piece by JPMorgan economists which discussed management of the Federal Reserve balance sheet and various exit strategies from the array of unconventional policies which the Fed currently employs.<\/p>\n
When will the Fed hike rates?
\nThe FOMC has stated an intention to keep rates low \u201cfor an
\nextended period.\u201d Now that the economy has moved from
\nfree-fall to controlled descent, the question of what an \u201cextended
\nperiod\u201d means is becoming more interesting. Over
\nthe last 15 years, the dominant paradigm for understanding
\nmonetary policy has been interest rate rules and, in particular,
\nthe Taylor rule. In its simplest form, the Taylor rule says
\nthat the fed funds rate is set in response to deviations of inflation
\nfrom a target inflation rate and of output from its
\nfull-employment, or potential, level. (Alternative variants
\ninclude the lagged funds rate or forecasts of future output
\nand inflation). The popularity of the Taylor rule stems from
\ntwo factors: first, the empirical success of the Taylor rule in
\nfitting the actual behavior of monetary policy has meant that
\nthe rule is often used to describe and predict the path for the
\nfunds rate, and second, in more theoretical derivations of
\nthe optimal policy rule that central banks should use, Taylor-
\nlike rules are usually prescribed as the ones central
\nbankers should follow.
\nIf one takes this latter proposition seriously, and believes
\nthe FOMC does as well, then the prospect of a hike in the
\nfunds rate anytime before 2011 looks exceedingly unlikely.
\nThe main reason for this is that even under fairly optimistic
\nassumptions about the outlook for growth over the next 18
\nmonths, the output gap should remain negative and large in
\nabsolute value. The J.P.Morgan forecast sees negative output
\ngaps persisting until 2013. Because inflation is also expected
\nto persist at a rate below the Fed\u2019s 2% target, the prediction
\nof a standard Taylor rule would predict the that the
\nfunds rate would not turn positive for at least another two
\nyears, even with core inflation hovering near 1.5%. If instead,
\ncore inflation were to turn flat, Taylor-rule predicted policy
\nrates could stay at zero for three years or even longer.<\/p>\n","protected":false},"excerpt":{"rendered":"
This is an excerpt from a very long piece by JPMorgan economists which discussed management of the Federal Reserve balance sheet and various exit strategies from the array of unconventional policies which the Fed currently employs. When will the Fed hike rates? The FOMC has stated an intention to keep rates low \u201cfor an extended […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[],"class_list":["post-6531","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9YXi-1Hl","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/6531","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=6531"}],"version-history":[{"count":1,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/6531\/revisions"}],"predecessor-version":[{"id":6532,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/6531\/revisions\/6532"}],"wp:attachment":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=6531"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=6531"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=6531"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}