Academic journal article ABA Banking Journal

Understanding Fed Speak: Targets, Thresholds, Guideposts, and Goals Are All in Play

Academic journal article ABA Banking Journal

Understanding Fed Speak: Targets, Thresholds, Guideposts, and Goals Are All in Play

Article excerpt

The Federal Open Market Committee's (FOMC) announcement last month had two components: asset purchases and forward guidance on the federal funds rate. The large-scale asset purchase program (commonly called QE3) will be $85 billion per month in 2013 and remains open ended. FOMC said: "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability." This guidance is qualitative; it depends on a general sense of the labor market, not a specific number. The Fed will look at various labor-market indicators and keep an eye on the inflation outlook.

Previously, the Fed stated a date through which conditions were expected to warrant exceptionally low levels of the overnight lending rate based on expected economic conditions. When the economic outlook changed, the date changed. Now, the Fed will simply list the economic thresholds. Specifically, the Fed indicated that it "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 6.5%; inflation between one and two years ahead is projected to be no more than a half percentage point above the [FOMC's] 2% longer-run goal; and longer-term inflation expectations continue to be well anchored." The unemployment and inflation thresholds are quantitative--that is, numeric. The 6.5% unemployment rate is a threshold, not a target, for when the Fed may start raising the overnight lending rate. …

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