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 Times’ Binyamin 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.
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