Implementing Monetary Policy
Table of Contents
1. Measures of the Macroeconomy
To implement monetary policy the FOMC must first know the present state of the economy. To implement monetary policy well it also has to know how the economy will perform in the near future. Therefore the first steps in the monetary policy process are to generate and understand reports on current economic conditions. Many of the economic reports are done by district federal reserve banks on conditions within their region. The main report is the Beige Book.
1.1. Specific Macroeconomic Variables
The Fed is specifically interested in economic growth (GDP), unemployment, and inflation.
1.1.1. Unemployment
Two often cited measures of unemployment are the unemployment rate, and the labor force participation rate. The unemployment rate is cited more often, however it is the more managed number. For example, the long-term unemployed are excluded from the calculation. The labor force participation rate measures the proportion of the workforce that is employed at a given time, and is less subject to manipulation.
For example, the FRED website notes about the Labor Force Participation Rate. The unemployment rate is managed such that "secular increase of exits from the labor force" have no effect.
demographic changes such as the aging of population can lead to a secular increase of exits from the labor force, shrinking the labor force and decreasing the labor force participation rate
2. Calculating the Correlation between the Fed Funds Rate and Inflation
The first question to ask is, if the FOMC does it job well, what should the correlation be?