Federal Reserve Chair Janet Yellen has said the tenor of economic data will decide when the U.S. central bank raises interest rates. Surprisingly, a data analysis based on Yellen’s own priorities points to a rate increase by the end of this year.
Yellen has cautioned that the economic models built for policymakers amount to mere guideposts in a complicated decision-making process.
But she also has placed special emphasis on a set of equations for what she dubbed in a November 2012 speech as “optimal policy” or “optimal control.” The equations mimic the churning of a vast economy and project a rate path that gives equal importance to meeting the Fed’s twin goals of maximum employment and stable prices.
Last Friday, Fed economists said in a note that they had updated the model, and the new version suggests the central bank should tighten policy enough to have the federal funds rate average 0.33 percent in the October-December period of this year.
The Fed has kept the rate, which governs overnight lending between banks, in a zero to 0.25 percent range since late-2008.
However, it’s clear the Fed is not following this model.