Today, the Federal Reserve announced that it will keep its foot on the easy-money pedal until the unemployment rate drops below 6.5% or inflation looks to go above 2.5%. The proposal has been getting some press as of late (you can see my recent post after Fed Vice Chair Yellen brought up the idea in November). This is almost exactly what Chicago Fed president Charles Evans proposed back in 2011. Well, Evans has evidently convinced everyone else at the Fed. Well, not everyone…Jeffrey Lacker dissented again (I’ve mentioned Lacker before too).
What we’ve got now is a shift in policy communications. The Fed has dropped its time-based estimates (e.g., “at least through mid-2015”) in favor of explicit targets tied to the two factors of its dual mandate: maximum employment and price stability.
This change in communications style is an attempt to let people’s expectations of Fed policy adjust with changes in the economy. This also lets the market know that the Fed is willing to tolerate a bit of short-run inflation while the unemployment rate works its way down.