The Fed Shifts its Stance – Acknowledges the Odd Man Out

December 15, 2012 in U.S.

The statement out of the FOMC after its latest meeting contains a significant sentence:

“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.”

This is at variance with its earlier statement(s) which read like this:

“In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

Notice that regulation of the interest rate is no longer open-ended, with just a long time indication out in the future. Instead, it is now linked to specific economic milestones such as the unemployment rate and projections of inflation.

The reason for the change could be very specific changes in the economic scenario such as a recovery in the housing market, better employment, or a change in inflation dynamics – all of these could impel the Fed to guard its flanks and not be caught with an easy money policy that is locked onto a time target. Hence it built in the flexibility to change track, and raise interest rates should the situation so demand.

I would, however, like to point to a different motive, and that is the Fed has acknowledged the views of its most consistent, and usually lone, dissident in Jeffrey M Lacker, President of the Richmond Fed.  Lacker opposed the Fed’s view after the historic September FOMC meeting at which Bernanke pulled out all stops as far as quantitative easing was concerned. The Fed reported his dissenting view at the time as follows:

“Voting against the action was Jeffrey M Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.” (Emphasis added)

Lacker released his own statement after that same meeting, and a portion relating to low interest rates reads as follows:

“Such an implied commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates.” (Emphasis added)

Seems to me he was spot on, and the change in stance by the Fed acknowledges that.

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