Posted Monday, Dec. 17, 2012, at 10:21 AM
I like the Federal Reserve's Federal Open Market Committee's new posture of saying it won't consider higher interest rates until unemployment goes below 6.5 percent unless inflation gets above 2.5 percent a lot better than the FOMC's old posture of saying that conditions warranting low rates would persist into 2015. The new posture is a clearer communication of what they're trying to say, and it's a much better conceptual framework for thinking about monetary policy than time-based guidance.
But it's not a radically different underlying policy. Above you can see Michael Greenstone's chart of how long it will take to reach 6.5 percent unemployment under different average monthly job-creation scenarios. The conclusion is that if we stay on the 220,000-jobs-per-month pace that we've been on for the past 12 months, we'll hit the Fed's 6.5 percent unemployment threshold sometime in 2015. That in turn probably sheds some light on why the proposal switches from Charles Evans' original 7-or-3 to the 6.5-or-2.5 that was actually adopted. If you work backward from the old policy, 6.5 is the right number to express it in the new way. And then because you've become more aggressive on the unemployment target, you get tighter with the inflation target to build political consensus.