Jan Hatzius: Here’s What Gets The Fed To Move

With so many storm clouds on the horizon, Goldman economist Jan Hatzius reveals what he thinks ultimately gets the Fed off the sidelines.

In a live interview on CNBC’s Fast Money Halftime Report, Htazius said not until the Fed’s dual mandates for inflation and employment take a sharper turn for the worse – not until then, will the Fed make an aggressive move.

Looking at those dual mandates, in January the Fed declared that its long-run target for inflation was 2%.

It’s other mandate, employment, is less specific. The Fed wants full employment but has also said it was not appropriate to adopt a fixed goal. The Congressional Budget Office has suggested full employment is around 5.5%.

“Yes, inflation is currently below targets,” explains Hatzius. "And they will be missing their employment mandate by a significant amount through the end of 2014,” he adds.

But that's not enough -- deterioration has to get worse, says Hatzius

“When we see further downward revisions on inflation and employment – that’s what will get the Fed to move.”

And Hatzius fully expects the economy to get worse. “The latest information on the economy has been on the softer side,” he says. "Although they did take a substantial step (by extending Operation Twist) we think they will have to do more. And there are options – further extension of guidance for the funds rate and an asset purchase program – we think we see both of them."

On a related note, Hatzius made headlines earlier in the week when he said the Fed’s decision to extend Operation Twist would help the economy in the near term but made for trouble at year’s end.

That's because at the same time Twist ends in late December the US will also be facing the fiscal cliff - the period when a slew of tax cuts and stimulus programs come to an end.

Fast Money executive producer John Melloy wrote about the phenomenon at length. Click here to go to Beware the Looming ‘Monetary Cliff’: Hatzius

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Posted by CNBC's Lee Brodie

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