Monday, June 24, 2013

Did the Fed move the target?

. - by New Deal democrat

There's been some blowback in the last few days about whether the Fed actually introduced any uncertainty, or changed from a data-responsive to a calendar-responsive regime. After all, Bernanke must understand the consequences of higher long term interest rates, so he will hold off, or reverse course, if it looks like the economy is faltering.

But this confidence ought to evaporate if, in fact, the Fed has moved the goalposts, as a writer at Naked Capitalism thinks:
For those who arent refinancing their mortgages and without financial investments, it’s hard to say what the Fed has accomplished; their earlier stated targets were to lower unemployment to 6.5%, and to allow short term inflation to reach 2.5% in order to stimulate growth. Now, however, ..., they say they’ll be satisfied with 7% unemployment, and despite inflation fears accompanying the quadrupling of the Fed’s balance sheet, core PCE inflation was at a record low in April. From here, it seems they just want to get out ....
If the Fed has moved its unemployment and inflation targets, that hardly inspires confidence that it is being data driven. It sounds more like the Fed wants to get out of the QE business, and soon, and is willing to lower the standards however necessary to get there.

So, has the Fed moved the goalposts? Here's the Fed statement from half a year ago establishing the unemployment and inflation markers:
...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.
Did you catch the distinction? The Fed hasn't necessarily changed the standards for raising interest rates.. What is different is that the Fed has established new, looser criteria for ending QE. So if you thou thought the Fed was going to keep its entire zero lower bound regime in place till its previously disclosed criteria were met, silly you! You weren't reading closely enough.

Feel reassured now?