The big issue the latest FOMC members debated in today's
minutes was a move to "specific threshold values" for
unemployment and inflation.
Specific targets for these two variables would provide
"forward guidance regarding the timing of the initial increase in
the Fed Funds rate". Currently, the Fed relies solely on a
mid-2015 calendar date to communicate when the Fed Funds rate is
to move off its zero level.
This new approach would be some version of a plan offered by
Chicago Fed President Charles Evans. He wants the Fed to
tell financial markets that it will keep Fed Fund rates low --
until the unemployment rate falls below 7%, and as long as
inflation remains below 3%.
FOMC minutes showed three issues needed to be resolved, before
officials would use "economic thresholds."
The three issues:
(1) Whether to specify such thresholds in terms of
realized or projected values
of inflation and the unemployment rate. And, in either
case, what values for those thresholds would best balance the
Committee's objectives of promoting maximum employment and price
(2) Whether to supplement thresholds expressed in terms of the
unemployment rate and inflation with
of economic and financial conditions that might signal a need
either to raise the federal funds rate before a threshold is
crossed, or to delay until well afterward.
Whether the statement should also provide forward guidance
about the likely path of the federal funds rate after the initial
. It was noted that such guidance could have significant
effects on financial conditions and the economy.
At the conclusion of the discussion, Chairman Bernanke asked
the staff present to provide additional background material,
taking into account the range of participants' views.
What do you think?
Would using "specific threshold values", i.e. an unemployment
below 7% and inflation below 3%, better communicate an upward
change in the Fed Funds rate from zero?
Or would adding these two variables just add confusion?
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