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The Fed Now Playing by Its Own Rule



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The Federal Reserve’s Open Market Committee made a dramatic announcement today, going further than its October statement, in which it declared that it would keep rates low through mid-2015, and continue quantitative easing until it determined that economic conditions improve significantly. Now it’s put a rule on that:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. . . .

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance.

As many have noted, the Fed’s declaration quite resembles the “Evans rule,” proposed by Charles Evans, president of the Chicago Fed (Evans first proposed 7 percent unemployment and a 3 percent inflation limit in 2011, but later revised it to the numbers the Fed’s just adopted). Their announcement of “QE3” in October resembled this kind of policy, but it’s now been codified and enumerated, although the numbers chosen (6.5 percent unemployment, 2.5 percent inflation) remain relatively conservative.



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