BofA Securities has published a guide outlining the fundamentals of "Fed surveillance," covering the central bank's mandate, voting power, communications, and rebalancing instruments.
According to the bank, the Federal Reserve operates under a dual mandate of maximum leverage and price stability, with price stability defined as a 2% cap on the personal consumption expenditures index. BofA noted that rate hikes generally reduce inflation but increase unemployment, reinforcing short-term trade-offs, which become particularly effective during periods of supply shocks.
The Federal Open Market Committee (FOMC) establishes a majority voting method, BofA reported: up to 12 members participate in the vote, and decisions typically require seven votes. According to the bank, the regional Federal Reserve Bank presidents voting this year—Hammach of Cleveland, Logan of Dallas, Kashkari of Minneapolis, and Paulson of Philadelphia—are hawkish.
At the June meeting, the Fed left interest rates unchanged at 3.75%. Along with most FOMC members, they leaned hawkish at the meetings, allowing for at least one rate hike before the end of the year.
The meeting was the first under new Fed Chairman Kevin Warsh, who announced a major review of the central bank's approach to communications and economic forecasts.
The U.S. Central Bank reported that its assessment of the Fed's monetary policy stance is based on several analytical tools, including control-style policy rules, financial conditions indices, output and unemployment gaps, and an estimate of the neutral interest rate, the so-called r-star. The bank's current creditworthiness points to upside risks for both inflation and unemployment.
To gauge market expectations, BofA stated that it prefers overnight FOMC index swaps (OIS) over federal funds futures and SOFR futures, calling OIS the best proxy for rate expectations, although all three instruments should generally provide average signals.
According to BofA, the Fed's balance sheet is $6.7 trillion, or approximately 21% of nominal GDP. The assets of major governments, consisting of Treasury bonds and mortgage-backed securities of the then-funded institutions, continue to dominate bank reserves, cash in monetary terms, and the largest amount of financial sector cash.