This document provides an analysis and recommendations regarding the Federal Reserve's monetary policy normalization process. It summarizes recent economic data trends in the US and globally. It then outlines a preferred sequence of actions for normalization, including ceasing reinvestment of maturing bonds and raising interest rates as unemployment approaches historic levels. The document recommends a data-driven approach to raising rates based on continued output recovery, stable inflation expectations, and focusing on global stability over currency fluctuations. It includes appendices calculating an "adjusted" unemployment rate and estimating the impact of dollar strength on GDP.

1. Are we there yet? Conundrum warrants poise.
1
“For every complex problem
there is an answer that is
clear, simple, and wrong.” –
H.L. Mencken.
So while there is no
substitute for considering a
variety of theories, we offer
a reasonable framework for
timing consideration for
reducing accommodative
policies.

2. Output: Few Recent Concerns, But Dollar Strength May Slow Positive
Momentum
Source: FRED.
2

3. Output: Manufacturing-related Data Trends Likely More Volatile in 2015,
but expect Consistent Rise in Post-Recession Household Formation
ISM
HOUSEHOLD
FORMATION
Sources: Bloomberg and U.S. Census Bureau.
3

4. Labor: Unemployment Improvement Since 2009; Quits Rate Rising
Gradually, but Still Below Pre-Recession Level
4

5. Labor: “Adjusted” U-3 as a key policy factor?
5Sources: F.O.M.C. and estimates (see Slide 14).
Adjusted U-3 could provide a
more stable NAIRU indicator for
policy discussions, decisions and
communications.
One current data set suggests a
baseline NAIRU achievement
timeframe of mid-2016, with
expansionary upside of late-2015,
and global economic downside
risk of early-2017.

6. Labor: Upward Wage Trajectory, Below Pre-Recession Levels,
Controlled by LFPR Level
6

7. Currency: Net Exports likely suppressing real GDP growth by
0.25%-0.75%
7
Given the roughly 10-15%
weighting of international
trade in the the U.S.
economy according to the
Chamber of Commerce, the
recent roughly 15% strength
in the U.S. dollar may
depress real GDP growth by
0.25%-0.75%. See slide 14
for calculation.
Source: N.Y. Times.

8. PCE: Core Lagging 2% target; LFPR and strong dollar partly to blame.
8
Source: Barron’s, March 30, 2015.

9. Inflation: Subdued expectations likely until ‘adjusted’ U-3 NAIRU in
mid- or late-2016; expect inflation ‘wiggles’ with dollar weakness.
9

10. Balance Sheet: Despite “Tantrum,” Tapering Has Been Right
F.O.M.C. Adjustment; Strong U.S. asset demand may offer opportunities
for securities sales in later stages of policy normalization process
10

11. Preferred Sequence of Normalization Actions
1. Cease reinvestment of maturing bonds.
2. Fed Funds Rate target increases as ‘adjusted’ U-3 approaches NAIRU.
• Consistent with Taylor Rule principles (see Appendix III on Slide 15)
• Implemented with scheduled communications and Interest-On-Excess-
Reserves and Over-Night-Reverse-Repurchase-Agreements
3. Controlled, opportunistic, limited, periodic Treasury bond sales during
peak financial markets demand periods for U.S. Dollar-denominated
assets – initial sales should favor shorter maturities to keep mortgage
rates attractive.
11

12. Recommendation: Data-Driven “When” on FFR
Summary: (1) consistent U.S. output recovery, albeit below historical
trend; (2) ‘adjusted U-3” suggests little urgency to FFR change; (3)
global economies and currencies weakness limiting U.S. inflation
expectations; (4) domestic wages and loan growth controlled, but
upwardly biased; and (5) FFR target increases historically problematic
when USD demand high
Key Tools: (1) “Opportunistic Overheating” in absence of target PCE
data and when LFPR below historical norms; (2) Employment and
output trends solid, with wage trends controlled due to LFPR; and (3)
focus on global economic stability, not currency fluctuations. 12

13. Appendix I: Calculation of ‘adjusted U-3” at 65% LFPR
13

14. Appendix II: Estimated Impact of U.S. Dollar Strength on Reported
Real G.D.P.
14

15. Appendix III: Synthesis of Taylor Rule principles, ‘adjusted U-
3’ and Okun’s Law
15