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For the FOMC, Gradual Tightening Is Only Natural
Chairman Powell’s monetary policy report included a discussion of monetary policy rules, the formulas used to guide fed funds rate policy built around the concept of a natural rate of interest. Most of the rules suggest the optimal fed funds target is low but increasing, consistent with the Fed’s repeated assurances about the gradual pace of rate hikes. The margin of error is wide. Formulas used to compute the natural rate, a critical component in policy rules, all have wide confidence bands. As a result, individual policy rules generate very different results when using specific estimates of the natural rate and even wider results when allowing for the 95% confidence intervals of the various estimates.Plus "The Week Ahead," a preview of next week’s potentially market-moving events.
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