FOMC Rate Path & Transmission Engine

Evaluate policy rate prescriptions, forecast meeting paths against prediction market expectations, and trace real-economy transmission from the Fed Funds target through the yield curve into mortgage and corporate credit costs.

Scenarios:

Macroeconomic State

LIVE INPUTS

Headline / Core PCE Inflation 3.4% Fed annual target is 2.0%. Higher spreads trigger aggressive rate hikes. Unemployment Rate (U-3) 4.3% Estimated Non-Accelerating Inflation Rate (NAIRU): 4.1% Current Fed Funds Target (Upper) 4.75% Current benchmark overnight corridor rate set by the FOMC. Neutral Real Rate (r*) 1.25% Equilibrium interest rate neither stimulating nor restricting the economy. Policy Reaction Function Market Implied Dec Meeting Hike Odds 72% Derived from prediction platforms (Kalshi) & 30-day Fed Funds futures.

Taylor Target Rate
5.40%

              Policy Gap:
              +65 bps
            

Recommended FOMC Action

+25 bps Hike

RESTRICTIVE

2Y / 10Y Yield Spread

-0.28%

INVERTED CURVE

30Y Fixed Mortgage Est.

6.95%

Mo. on $400k: $2,648

FOMC 4-Meeting Projected Policy Corridor

Credit & Consumer Transmission Spot Spread

Bank Prime Lending Rate 7.75% +0.25%

Average Credit Card APR 21.85% +0.25%

60-Month New Auto Loan 7.82% +0.18%

SBA Commercial 7(a) Benchmark 10.75% +0.25%

Treasury Maturity Matrix Term Structure

3-Month T-Bill (Risk-free Short) 4.72%

2-Year Treasury (Policy Sensitive) 4.48%

10-Year Treasury (Benchmark Long) 4.20%

12-Month Recession Probability 38.4%

Parameters live: Policy gap indicates restrictive pressure. Ready for export.

1. The Taylor Rule Mechanics

John Taylor’s policy benchmark models nominal policy rates based on real equilibrium interest rates (r*), actual inflation versus the Fed's 2% mandate, and employment slack (Okun’s law output gap):

R = r* + π + α(π - π*) + β(Output Gap)

When inflation remains entrenched above target, the rule demands nominal rates higher than inflation to enforce positive real rates and compress aggregate demand.

2. Prediction Markets vs Central Bank

Market quotes (e.g., Kalshi contracts & CME FedWatch) reflect real-money hedging odds for specific meeting outcomes. When market hike odds deviate from rule-based benchmarks, asset volatility spikes around FOMC press conferences as markets re-price the terminal rate corridor.

3. Real Economy Transmission Lag

Changes in the Fed Funds rate feed within 24 hours into prime lending and floating-rate debt (credit cards, revolving credit lines). Long-term rates (mortgages, 10Y notes) incorporate term premiums and future rate cut expectations, typically shifting consumer activity with an 8 to 18-month transmission lag.