A Summary Of The US Monetary Policy Peering Into 2018

US Monetary Policy: Peering Into 2018 The fast approaching US Christmas shopping season is always a convenient juncture to review the baseline outlook for the economy and, therefore, monetary policy over the next year. Meanwhile, Congress appears to be busy formulating tax reform proposals that will ultimately be resolved by a Conference Compromise Agreement. President Trump appears keen to get tax reform passed by the end of 2017. Consequently, incoming Fed Chairman Powell may be forced to forge an appropriate monetary offset in 2018. US economic activity accelerated during 2017, partly due to a recovery in oil prices that helped to spur higher capital spending. Crucially, faster underlying growth has pushed the economy into above-trend†¦show more content†¦Should the economy fail to decelerate as supply constraints continue to mount, then ensuing rate rises will become front-end loaded than currently expected in financial markets. Fed Policy: Limited Recent Experience of Life at Full Employment Arguably, we are entering an environment where most policymakers and commentators have limited experience of an economy operating at full employment for a protracted period. Despite its critics, the Phillips Curve remains an integral part of the Fed’s econometric model of the US model. The decline in inflation, notably since 1995, has contributed to an increased incidence of flattening in the curve. Moreover, the compressing of the curve has persuaded some commentators to claim that the Phillips Curve has effectively been rendered useless as a policy guide. Their contention is that supply constraints in the labour market, as testified by low unemployment, no longer need to be heeded. The last time the US economy endured a protracted period of growth whilst at full employment was during the late-1960s. Unemployment dipped below 4% in February 1966 and remained in this territory for four years. Although the economy continued to expand, inflation accelerated from 1.9% to 6.2% at the end of 1969. Thus, the combination of full employment and continued economic growth eventually produced higher inflation, something which the FOMC was slow to respond to with