Fat Lady Wanted as Guide to Fed Rate Setters: Caroline Baum
There’s no canary in the coal mine to keel over, no fat lady to
sing, no early warning system to signal imminent danger.  Yet
somehow the Federal Reserve will know when the time is right to
exit from what it calls “the current exceptionally accommodative
stance of policy” to something a little less exceptional?  How,
exactly? What will tell policy makers the era of easy money is
over?  The Fed has econometric models that predict growth and
inflation (they’re silent on asset bubbles). It relies on
something called the output gap, or the difference between
actual gross domestic product (hard to compute) and potential
GDP (a moving target), to warn of inflation on the horizon. It
monitors headline and core inflation (lagging indicators). It
pays a lot of attention to inflation expectations as reflected
in the spread between yields on nominal Treasuries and those
indexed to inflation. And it keeps a close eye on wages, which
are the biggest input cost f