The Washington Post got these comments from Michael Woodford:
As I’ve discussed before, I think there are important advantages of clarifying the criteria that will determine likely future policy. Today’s statement provides important additional clarification of the conditions under which it will be appropriate to begin raising short-term interest rates, relative to the FOMC’s statements in September and October. Such clarification is particularly likely to help stimulate the economy when, as in this case, it indicates that the conditions required for policy tightening will not be reached as early as some might have expected on the basis of past Fed behavior.
The explicit thresholds mentioned today are not ones that will be reached as soon as a federal funds rate above 25 basis points would be dictated by a reaction function estimated on the basis of the FOMC’s pre-crisis decisions, and in that respect the announcement should change the forecasts of future Fed policy of at least some market participants.
A more explicit discussion should also reduce some of the considerable uncertainty about Fed policy that has resulted from the series of unprecedented actions taken over the past few years. While the quantitative thresholds announced are not the ones that I have advocated, they represent a substantial improvement upon the date-based approach to forward guidance that continued to be used in the September and October FOMC statements.
The statement also clarifies that the federal funds rate target will remain low even after the asset purchase program ends; this has the advantage of allowing that program to end without the FOMC having to fear that this would be taken as a signal that interest-rate increases are also imminent. While there are no plans to end the asset purchases soon, I think it is important that the FOMC not be boxed in to a continuation of asset purchases at the current rate for as many years as might be needed to reach the thresholds required to justify raising short-term interest rates.
Some people have wondered why the stock market reaction was so muted. I think Woodford provides two reasons here. The guidance wasn’t as aggressive as he would have liked, and it was already close to what the markets expected. Woodford would have preferred something more aggressive, i.e. something that would lead to greater than 5% NGDP growth. In my view this policy is probably expected to lead to 4% to 5% NGDP growth.
PS. Also over at the WaPo, Brad Plumer has a good article about how there is increasing global momentum toward more monetary stimulus.
PPS. Readers than are fluent in French might wish to take a look at this paper by market monetarist Nicolas Goetzmann.