Was There A Major Bombshell In Today's FOMC Minutes?

Ben Bernanke

Photo: commons.wikimedia.org

Interesting catch from Texas State economics prof David Beckworth who notes this paragraph in the FOMC minutes With short-term nominal interest rates constrained by the zero bound, a decline in short-term inflation expectations increases short term real interest rates (that is, the difference between nominal interest rates and expected inflation), thereby damping aggregate demand. Conversely, in such circumstances, an increase in inflation expectations lowers short-term real interest rates, stimulating the economy. Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP.

Targeting actually GDP? This would be incredibly aggressive and a major win for the doves, and it might explain why stocks rose on the news, even though the fundamental facts — that the Fed would commence QEII — were never in doubt.

(Via @credittrader)

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