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.

Output: Few Recent Concerns, But Dollar Strength May Slow Positive

Momentum

Source: FRED.2

Output: Manufacturing-related Data Trends Likely More Volatile in 2015,

but expect Consistent Rise in Post-Recession Household Formation

ISM

HO

US

EH

OL

D

FO

RM

AT

ION

Sources: Bloomberg and U.S. Census Bureau.3

Labor: Unemployment Improvement Since 2009; Quits Rate Rising

Gradually, but Still Below Pre-Recession Level

4

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.

Labor: Upward Wage Trajectory, Below Pre-Recession Levels,

Controlled by LFPR Level

6

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.

PCE: Core Lagging 2% target; LFPR and strong dollar partly to blame.

8Source: Barron’s, March 30, 2015.

Inflation: Subdued expectations likely until ‘adjusted’ U-3 NAIRU in

mid- or late-2016; expect inflation ‘wiggles’ with dollar weakness.

9

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

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

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

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

13

Appendix II: Estimated Impact of U.S. Dollar Strength on Reported

Real G.D.P.

14

Appendix III: Synthesis of Taylor Rule principles, ‘adjusted U-

3’ and Okun’s Law

15