Fed Governor Janet Yellen gave a speech yesterday on what the Federal Reserve could do to promote better monetary policy via better communication.
In it, she basically foretold the Fed’s next move: Rather than saying things like “We’ll have low interest rates through 2015” the Fed will say things like “We’ll have low interest rates until Unemployment falls to 7%” or something ike that.
This basically puts her in line with Chicago Fed Chief Charlie Evans, who has basically proposed exactly this: A promise not to ease up until 7% unemployment or 3% core inflation.
Here’s Goldman’s quick summary of Yellen’s remarks:
- Fed Vice Chair Janet Yellen delivered an important speech on Fed communication today. We see three takeaways: (1) the committee appears close to shifting the forward guidance from a calendar-based to an outcome-based approach; (2) any threshold rule is likely to be expressed in terms of unemployment and inflation; and (3) any outcome-based guidance is (for now) likely to be specified for the funds rate only.
- We therefore consider it likely that the FOMC will adopt a threshold rule, possibly already at the December meeting. However, a number of open questions remain and we will look to the minutes of the October FOMC meeting published on November 14 for any additional details. These include: (1) the horizon of the inflation threshold; (2) the numerical choice of the thresholds; and (3) whether the rule would be expressed using thresholds or triggers.
As noted there, minutes come out today, and it will be worth looking to see if there are hints of this emerging.
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