The important novelties in the statement are in paragraphs 5 and 6. Paragraph 5 reads:
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.Any numerical targets - except a reaffirmation of the 2% inflation goal - are now left out, which I think is a good thing. The FOMC is telling us that it will look at everything, and that the policy rate will likely stay where it is well into next year. We're basically back to "extended period" language, but it seems to have taken many more words to get that idea across.
Paragraph 6 is:
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.Paragraph 5 told us something vague about when "liftoff" will occur - the date at which the policy rate starts to increase. Paragraph 6 concerns post-liftoff Fed behavior. The "balanced approach" is outlined in this 2012 speech by Janet Yellen. "Balanced" means following a Taylor rule derived from a loss function with equal weights on squared deviations of the unemployment rate and inflation, respectively, from their targets. In Yellen's speech, she used 5.5% as an unemployment rate target and 2% as an inflation rate target. But the second sentence in the paragraph also tells you that, for a period of time after liftoff occurs, the policy rate will be less that what the balanced approach implies. Presumably that's to fulfill the commitment implied by the old forward guidance language (see my last post).
1. It's clear what the model is here. It's a 3-equation reduced form New Keynesian model ("IS" curve, Phillips curve, Taylor rule). It's the Phillips curve which is driving the Fed's inflation forecast. Essentially all of the regional Feds and the Board have inflation increasing very gradually to 2% in the long run. Thus, the Fed expects that, given the policy rule laid out in paragraphs 5 and 6, that it will be getting close to its targets of 2% inflation and (presumably) 5.5% unemployment in a couple of years. One problem is that the Phillips curve hasn't been doing so well lately as an inflation predictor (as if it ever did well), what with inflation and unemployment both falling. A second problems is that, if inflation continues to be low, that will extend the tapering period, and extend the period until liftoff. This, as we know, just leads to self-fulfilling low inflation. There is no recognition of that possibility in the statement.
2. Why use so many words to say so little?
Note that Kocherlakota dissented:
Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee's commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.I don't quite understand his objection. If he thinks the statement implies an overshooting of the 2% inflation target (which I assume he doesn't like), that's in the second sentence of paragraph 6, not in 5. Maybe he just wanted to include an explicit 5.5% unemployment rate threshold in paragraph 5. Better left out, I think.