Surprise: A Single Indicator Explains the Federal Reserve's Reaction Function
The central bank may be more data dependent than we think.
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The Federal Reserve's decision to hike interest rates in December but abstain from further policy tightening in March has raised questions about the central bank's reaction function—that is, what prompts members of the Federal Open Market Committee to change their policy rate.
After all, both employment and inflation figures were running ahead of monetary policymakers' estimates at the time, yet not only did the Fed keep rates unchanged, but the median monetary policymaker also cut in half the estimate for how many rate hikes would be appropriate this year.