The Federal Reserve's statutory objectives of maximum employment and stable prices, which together shape how it reacts to data.
Most central banks have a single price-stability objective. The Fed's two goals can conflict: a supply shock raises inflation and unemployment at the same time, forcing a choice about which side of the mandate to prioritise.
Traders use the mandate to predict the reaction function. When inflation is near target, weak payrolls are read as dovish and bonds rally. When inflation is well above target, the same weak payrolls print can be read as disinflationary and bonds rally for a different reason, but a hot wage number will dominate everything.
Example: core-pce at 2.1% and the unemployment-rate rising from 4.1% to 4.4%. The employment leg is binding, so the market prices additional cuts and the front end rallies.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
Educational only, not advice. Spotted an error? Post in Site Feedback.