Here’s Matt Yglesias:
This is huge. With today’s policy announcement, the Federal Reserve’s Open Market Committee has stopped screwing around and started doing real expectations-based monetary easing.
The new policy is a version of the plan from Charles Evans that I wrote about in March. They’ve said that interest rates will remain low until unemployment falls below 6.5 percent or the inflation rate exceeds 2.5 percent. That is a softer and weaker form of monetary easing than Evans originally proposed, but apparently a meager inflation target is the price you have to pay politically to get this done.
I think it’s huge in an intellectual sense, but not in a policy sense. The Fed had already committed to keep money easy well into the recovery. This makes that promise more explicit. Which is good. But it’s still a long way from level targeting. A Japanese-style zero percent NGDP growth path over the next 2 decades is fully consistent with this commitment.
At the other extreme some are claiming that the Fed has abandoned or weakened its 2% inflation target. Not in the slightest. The Fed has a dual mandate for low inflation (interpreted as 2%) and the highest possible sustainable employment (intepreted as roughly 5.6% unemployment.) Under that sort of targeting regime it’s appropriate to drive inflation below 2% when the economy is in a boom, and above 2% when unemployment is high. Their dual mandate policy framework calls for more than 2% inflation right now. If they were not targeting above 2% inflation they would lose credibility, indeed they would be breaking the law.
Of course the critics do have a point; it’s dangerous to set a vague composite target constructed of inflation and unemployment, where the Fed reaction function is unclear. Today they’ve made it a bit clearer, and they’ve made monetary policy a tad more stimulative. But they still have a long way to go.
Mark Carney’s speech on NGDPLT was huge, or would be if enacted.