FED hike – Dual mandate perspective

 

Federal Reserve has a dual mandate; price stability and maximum employment. The chart is prepared in FRED dashboard of St. Louis FED.

How each mandate stands?

Price stability -

• Probability of deflation has diminished over the years through FED action.
• Inflation remained below FED's target of 2% since the crisis.

Maximum employment -

• Unemployment rate has dropped to 5.5% much faster than economists and FED were expecting.
• It currently stands at the upper range of the central tendency of longer run FED forecast.

Recent FED speakers -

• Loretta J. Mester - "Rate hike needed soon. Will not support a less than 25 basis points hike."
• Richard Fisher - " FED need to rate hike or lose credibility"
• James Bullard - "Rate hike is overdue"

Dollar -

• Excessive strength of dollar is sure to be discussed over the FED meeting and would pose a challenge for FOMC.
• Stronger dollar pose challenge for inflation as well.

Probability -

• FED to go with the first rate hike around June this year.
• Move to a neutral stance thereafter for much longer time than market is expecting.
• Shout the buck down, after the rate hike.