Today's new Federal Reserve statement is clearly intended to provide additional monetary stimulus to the country, extending the predicted zone of low interest rates out to 2014:
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
This is an improvement over their previous statement, but I'm still worried that it might be the wrong kind of statement. Anticipating that economic conditions are likely to warrant low rates is half an effort to boost growth, and half a prediction that growth will be weak. What I'd rather have seen is a conditional statement. Something like:
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent until the unemployment rate falls below XXX unless the core inflation rate rises above YYY.
If you do a statement like that with reasonable values for XXX and YYY the impact is clearly stimulative. As I've said before, if I was on the FOMC I'd advocate for aggressive values for both—something like 5 percent and 5 percent—but others might want to be more cautious. Structuring the discussion inside the committe around the XXX and YYY values would, however, be a productive exercise. And even very cautious numbers like 6 percent and 3 percent would give the economy a clear boost. The current phrasing is good for economics writers like me because it gives us something to explain, but an effective communications strategy shouldn't require explanation.
Still, this will almost certainly give the economy a shot in the arm and further bolster the Recovery Winter scenario.
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