Normalization Policy of the Fed and Conflicting US Economic Data

Abstract

The data-based monetary policy of the Federal Reserve System, the US Central Bank, results from a two-day meeting held by the members of the Federal Open Market Committee (FOMC) eight times a year. The principal decision regards the target federal funds rate upon which monetary policy is set to work. This paper examines the status of the US economy as a ground based on which the Fed has already taken the “liftoff” step in the normalization process of its balance sheet. Following the FOMC decision at the December meeting of 2014, the Fed commenced its “liftoff” process by raising the federal funds rate range of 0.5 0.75 from 0.00 0.5 in December 2015. The decision was, primarily, backed by the expectation of the continual fall in the unemployment rate. However, the data-based approach can sometimes be misleading. The numbers in data can be partial in revealing the economic facts due to its method of calculation. As a result, the given data may portray a different picture of the state of the economy. Following an evidence-based approach, this paper intends to overhaul a host of current economic data on economic growth and the labor market to retrace the debates on the Fed’s normalization policy.