FOMC Minutes Reveal Increasingly Serious Discussion of Evans-Style Quantitative Triggers

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Nov. 14 2012 2:17 PM

FOMC Minutes Reveal Increasingly Serious Discussion of Evans-Style Quantitative Triggers

The latest Federal Reserve Open Market Committee minutes are out and they reveal increasingly serious interest in an Evans Plan approach to monetary policy where the Federal Reserve would promise to keep rates at zero until unemployment drops to a certain level unless inflation reaches a particular ceiling:

A staff presentation focused on the potential effects of using specific threshold values of inflation and the unemployment rate to provide forward guidance regarding the timing of the initial increase in the federal funds rate. The presentation reviewed simulations from a staff macroeconomic model to illustrate the implications for policy and the economy of announcing various threshold values that would need to be attained before the Federal Open Market Committee (FOMC) would consider increasing its target for the federal funds rate. Meeting participants discussed whether such thresholds might usefully replace or perhaps augment the date-based guidance that had been provided in the policy statements since August 2011. Participants generally favored the use of economic variables, in place of or in conjunction with a calendar date, in the Committee's forward guidance, but they offered different views on whether quantitative or qualitative thresholds would be most effective. Many participants were of the view that adopting quantitative thresholds could, under the right conditions, help the Committee more clearly communicate its thinking about how the likely timing of an eventual increase in the federal funds rate would shift in response to unanticipated changes in economic conditions and the outlook. Accordingly, thresholds could increase the probability that market reactions to economic developments would move longer-term interest rates in a manner consistent with the Committee's view regarding the likely future path of short-term rates. A number of other participants judged that communicating a careful qualitative description of the indicators influencing the Committee's thinking about current and future monetary policy, or providing more information about the Committee's policy reaction function, would be more informative than either quantitative thresholds or date-based forward guidance. Several participants were concerned that quantitative thresholds could confuse the public by giving the impression that the FOMC focuses on a small number of economic variables in setting monetary policy, when the Committee in fact uses a wide range of information. Some other participants worried that the public might mistakenly interpret quantitative thresholds as equivalent to the Committee's longer-run objectives or as triggers that, when reached, would prompt an immediate rate increase; but it was noted that the Chairman's postmeeting press conference and other venues could be used to explain the distinction between thresholds and these other concepts.

The holdup here seems to me that while there's general support for the general concept, there are a lot of details to be worked out and the Fed is a small-c conservative institution so nothing's going to change until all that's ironed out. I'd say that there's a real job market emergency happening out there in the country and the Fed should err on the side of acting decisively even while they continue to talk through the details.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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