Thursday, December 13, 2012

Was the Fed Statement Really That Momentous?

Here's the money quote from yesterday's Fed release:

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.

So, the Fed won't move on rates until unemployment is below 6.5% or the inflation rate is above 2.5%.  Is this really a momentous decision?

It is in the sense that the Fed is issuing hard targets -- they're tying the rate decision to unemployment and they have given themselves a good escape hatch in regards to inflation (which, given their dual mandate, was required).  This does create a certain level of certainty for the markets, which some have argued is vitally important for an economy trying to emerge from a debt-deflation recession. 

However, does anyone out there think the Fed was going to raise rates anytime soon?  The Fed -- and literally every other "first world" central bank (Japan, UK, ECB, etc...) has rates at very low levels to combat sluggish economies, has had rates at those low levels for a number of years and has given us no signs that they intend to raise rates soon.  I don't know anyone in their right mind who has been watching the overall economic performance over the last few years (and especially the last few months) who thinks rates are going up.  And I think you could make a convincing argument that the only people making that argument are people who are trying to come with ideas for columns rather then reasonably analyzing the economic landscape.

Given the underlying data, I think this is more of a situation confirming what the market already thought -- that the ultra-low rate environment is here for a really long time -- rather than being anything revolutionary.