The Fed keeps edging in our direction

Here’s what I recommended back in October:

The forward guidance policy announced last fall was widely seen as a partial victory for the NGDP targeting approach:

1.  It combined inflation with a variable closely linked to RGDP growth.

2.  It made policy conditional on the state of the economy.

The basic idea was that the Fed promised they would not raise rates AT LEAST until one of the following two things happened:

1.  Unemployment fell to 6.5%

2.  Inflation had risen to 2.5%, on a forward-looking basis.

Dropping the unemployment trigger would make policy more expansionary, and that’s a good thing.

Today’s decision did not drop the unemployment threshold, but it weakened it.  It should simply be removed.  If they promised to wait until expected inflation rose to 2.5% before raising rates, it would mean roughly 2% inflation over the next few years, as the inflation rate is now running below 2%. That’s still too tight, but much better than the old policy, and even better than today’s revision.  Unemployment should never have been made a part of the forward guidance.



10 Responses to “The Fed keeps edging in our direction”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. December 2013 at 12:52

    So now we know what Christy said to Barack, ‘No, it hasn’t “shot its wad”‘?

  2. Gravatar of photon photon
    18. December 2013 at 12:57

    Here’s the bit that causing the waves in the equity markets:

    Expected 2015-end rate and expected 2016-end FF rate went from 1% and 2% to 0.75% and 1.75% respectively in the FOMC members’ projections. It is purely forward guidance instead of QE. That’s it.

  3. Gravatar of Peter Peter
    18. December 2013 at 15:32

    Shouldn’t you change your “About”? Seems at this point you are a pretty natural blogger, whatever that means.

    Also, good news from the Fed. In expectations in future improvements in monetary policy should we now all be buying stocks or has the market already rationally anticipated those gains? I feel like the market may be underestimating, how good things have gotten, in part thanks to, as TC memorably called it, Scott Sumner Day.

  4. Gravatar of Saturos Saturos
    18. December 2013 at 18:30

    The biggest news: for once, the sole dissenter on the FOMC thought the Fed wasn’t being expansionary enough!

  5. Gravatar of Saturos Saturos
    18. December 2013 at 18:33

    Also, clear language on the undesirability of sub-2% inflation.

  6. Gravatar of ssumner ssumner
    19. December 2013 at 08:54

    Everyone, Thanks for the comments. Not much to add here.

  7. Gravatar of Ken B Ken B
    19. December 2013 at 09:40

    I seem to be embroiled with Bob Murphy on this, and whether you have recanted your heresies or are being misread.

  8. Gravatar of ssumner ssumner
    19. December 2013 at 20:01

    Ken, Whenever Bob thinks I’ve changed my views, you can be almost certain that the only thing that has changed is Bob’s understanding of what my views were all along.

  9. Gravatar of Ken B Ken B
    20. December 2013 at 05:43

    Scott, Your phrasing was a little ungraceful and so, like with “you didn’t build that”, Bob is interpreting “that” in a strained and illogical way. I pointed out the grammatical and logical problems, and that if you read it correctly no contradiction arises.

  10. Gravatar of ssumner ssumner
    20. December 2013 at 06:49

    Thanks Ken.

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