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.

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