Foster maximum employment and price stability, the Federal Open Market Committee seeks in 2015. How to measure maximum employment? How to maintain price stability? Can a financial bubble be prevented?
Yes, based on the data provided in the Minutes of the Federal Open Market Committee (MFOMC) on September 16-17, the formula can be drafted to address the current situation. The interest rates impact private sector economy, employment and return to inflation target. While lower the unemployment goes, the higher the inflation, is not the case since 2009. The Rate Change Naturalistic Fantasy (NF) Formula is derived from the perception of the MFOMC data and the uncertainty of the financial evaluations:
0% inflation + 5.1% unemployment – 2% target inflation + 0% to 0.25% rates + 1.75% bubble = 4.85% to 5.1% unemployment in 2016
Accordingly, lowering the interest rate to -0.25% to 0% would result with 4.5% to 4.95% unemployment in 2016, while a raise to 0.5% would end with 5.1% to 5.35%. Leave it at 0% to 0.25% was the FED’s decision in September 2015.
Will the US unemployment rate be lower in the range from 4.8% to 5.05% in 2016, if the data is not going to change much in 2015? Will the inflation rate reach 1.8% in 2016, allowing to raise the interest rates to 0.5% and keep the unemployment rate under 5%?
(The ideas are based from the novel Blazing Night. Used with the written permission of the publisher: Jacek Walkowicz)