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December 12, 2012 3:21 PM Fed Sets Specific Economic Targets

By Ed Kilgore

So the Federal Reserve Board not only confirmed continuation of its recent mildly expansionist monetary policies today, but also set specific economic targets that would have to be met before they are reconsidered, per the New York TimesBinyamin Applebaum:

The Federal Reserve said Wednesday it planned to hold short-term interest rates near zero so long as the unemployment rate remains above 6.5 percent, reinforcing its commitment to improve labor market conditions.
The Fed also said that it would continue in the new year its monthly purchases of $85 billion in Treasury bonds and mortgage-backed securities, the second prong of its effort to accelerate economic growth by reducing borrowing costs.
The announcements reinforced a policy shift that began in September, formalizing the Fed’s commitment to reduce unemployment and breaking with decades during which limiting inflation was the central bank’s constant priority.

In other words, the Fed is continuing the “dual mandate” approach that conservatives deplore. But even modest inflation could upset the apple cart:

The slow pace of inflation has made the policy shift easier. The Fed said it expects prices to rise at or below the 2 percent annual pace that it considers most healthy. But the Fed also said that it was inclined to tolerate medium-term inflation as high as 2.5 percent without breaking its focus on reducing the unemployment rate.

Still, pegging expansionist policies to objective economic conditions rather than the calendar is “huge news,” according to Wonkblog’s Neil Irwin. No one should confuse it, however, with the continuing need for fiscal stimulus. But is does indicate the Fed won’t wash its hands of a sluggish economy if Congress refuses to do its part.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • c u n d gulag on December 12, 2012 3:49 PM:

    Continuing, or worsening, a sluggish economy, IS the Repubicans part in this Congress!!!

    And they dream every night of a 10% unemployment rate, with at least 10% inflation.
    And that's when they're not praying for a terrorist attack here in the US - preferrably in some Liberal bastion like NY City or Los Angeles

  • Memekiller on December 12, 2012 4:41 PM:

    Of course, if our Congress 'twer able to address the actual issues facing the nation rather reaching Village consensus we must do the opposite or be unserious, we wouldn't need the Fed to provide less successful stimulus a few years too late. The fact that an Obama appointee is now able to do what is best for the nation - only after the election - means progress, of sorts. We've made it to the primordial ooze stage.

  • Econ-omist on December 12, 2012 5:02 PM:

    Pledging to continue to expand its balance sheet in buying sovereign and mortgage debt at the pace of $85 billion per month until unemployment drops below 6.5% and/or inflation rises above 2.5%.

    Considering that both measures are tacitly rigged and phony, that pretty much means that Benny will print until the exhaustion and collapse of the dollar, or until it suits their interests not to do it.

  • Rick B on December 12, 2012 11:43 PM:

    It's true that the poor economy is almost the only thing the Republicans have going for attracting voters, but Bankers hate any inflation above zero. Both actions make the wealth of the top 2% - the people who are driving the policies of the conservative Republicans - more valuable.