Monetary Policy

The Fed is keeping Its focus on the Phillips Curve -- falling unemployment leads to rising
inflation and rising unemployment leads to falling inflation. Currently, the US is experiencing
moderate real economic growth with falling unemployment and low and relatively static
inflation with the CPI averaging below 2%. Significant slack remains in the economy and with
little inflation pressure, the Fed appears content to continue unwinding the QE program but
keep its ZIRP until the Phillips curve aligns properly with strong enough jobs growth to foster
faster inflation. With plant capacity growing at 2.8%, there is enough supply / demand balance
for the monetary authorities to not hasten to raise interest rates and see how the economy
responds to the wind up of the QE program. On certain fundamental measures the Fed can be
seen as suppressing short term interest rates and hawkish sentiment is clearly growing on the
Board. But Ms. Yellen is not yet under duress.