Mark Thoma:
Fed shifts approach in how it gauges U.S. economy: The Federal Reserve's monetary policy committee announced today that it will continue its policy of maintaining exceptionally low interest rates and expand its "quantitative easing" program by purchasing bonds at the rate of $85 billion per month… "at least as long as the unemployment rate remains above 6.5 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." This signals a change from time-based Fed policies….
But it's important to recognize that these are thresholds, not triggers. A 6.5 percent unemployment trigger, for example, means that if the unemployment rate falls below this level, a new policy is necessarily triggered, meaning the policy ends. But a 6.5 percent threshold brings about a discussion and a reassessment at the Fed of the appropriate policy….
[O]ne of the problems the Fed has had in its communications strategy is convincing people it will carry through with this commitment even if inflation drifts above the 2 percent target. In some sense, the Fed has too much credibility on inflation. The adoption of numerical thresholds -- in particular an inflation threshold that is a half a percent above target and the commitment to maintain present policy "at least" until the thresholds have been met -- is an attempt to overcome this communication problem though a commitment to a clear, well-defined policy rule.
