What the FOMC Said: More Clarification

UC San Diego professor Jim Hamilton is in my opinion one of the blogosphere’s best commentators on Fed policy, and his most recent post at Econbrowser has a nice, concise retrospective on U.S. monetary policy over the past four years. But in the nobody’s perfect category, there is one bit that I think requires a correction:

At the most recent FOMC meeting, the Fed signaled that QE3 purchases will continue as long as the unemployment rate remains above 6.5% and inflation below 2.5%.

Actually, those thresholds apply to the period of time that the members of the Federal Open Market Committee (FOMC) currently expect the federal funds rate target to remain near its zero lower bound. They do not apply to the duration of the FOMC’s asset-purchase programs.

Once again, I will turn to Fed Chairman Ben Bernanke’s words at his last post-meeting press conference:

Unlike the explicitly quantitative criteria associated with the Committee’s forward guidance about the federal funds rate, which I will discuss in a moment, the criteria the Committee will use to make decisions about the pace and extent of its asset purchase program are qualitative; in particular, continuation of asset purchases is tied to our seeing substantial improvement in the outlook for the labor market. Because we expect to learn more over time about the efficacy and potential costs of asset purchases in the current economic context, we believe that qualitative guidance is more appropriate at this time.

The Chairman goes on to explicitly discuss the 6.5 percent/2.5 percent thresholds on the forward guidance regarding the funds rate, and he circles back to the distinction between that guidance and the “QE3 purchases”:

It’s worth noting that the goals of the FOMC’s asset purchases and of its federal funds rate guidance are somewhat different. The goal of the asset purchase program is to increase the near-term momentum of the economy by fostering more-accommodative financial conditions, while the purpose of the rate guidance is to provide information about the future circumstances under which the Committee would contemplate reducing accommodation. I would emphasize that a decision by the Committee to end asset purchases, whenever that point is reached, would not be a turn to tighter policy. While in that circumstance the Committee would no longer be increasing policy accommodation, its policy stance would remain highly supportive of growth. Only at some later point would the Committee begin actually removing accommodation through rate increases. Moreover, as I have discussed today, the decisions to modify the asset purchase program and to undertake rate increases are tied to different criteria.

The separate moving pieces of interest rate policy and the Fed’s asset purchase program are subtle, and I admit at times confusing. But as monetary policy moves forward, it is important to keep the distinctions front and center.

About David Altig 91 Articles

Affiliation: Federal Reserve Bank of Atlanta

Dr. David E. Altig is senior vice president and director of research at the Federal Reserve Bank of Atlanta. In addition to advising the Bank president on Monetary policy and related matters, Dr. Altig oversees the Bank's research and public affairs departments. He also serves as a member of the Bank's management and discount committees.

Dr. Altig also serves as an adjunct professor of economics in the graduate school of business at the University of Chicago and the Chinese Executive MBA program sponsored by the University of Minnesota and Lingnan College of Sun Yat-Sen University.

Prior to joining the Atlanta Fed, Dr. Altig served as vice president and associate director of research at the Federal Reserve Bank of Cleveland. He joined the Cleveland Fed in 1991 as an economist before being promoted in 1997. Before joining the Cleveland Fed, Dr. Altig was a faculty member in the department of business economics and public policy at Indiana University. He also has lectured at Ohio State University, Brown University, Case Western Reserve University, Cleveland State University, Duke University, John Carroll University, Kent State University, and the University of Iowa.

Dr. Altig's research is widely published and primarily focused on monetary and fiscal policy issues. His articles have appeared in a variety of journals including the Journal of Money, Credit, and Banking, the American Economic Review, the Journal of Economic Dynamics and Control, and the Journal of Monetary Economics. He has also served as editor for several conference volumes on a wide range of macroeconomic and monetary-economic topics.

Dr. Altig was born in Springfield, Ill., on Aug. 10, 1956. He graduated from the University of Iowa with a bachelor's degree in business administration. He earned his master's and doctoral degrees in economics from Brown University.

He and his wife Pam have four children and three grandchildren.

Visit: David Altig's Page

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