Fed minutes show lots of talk, no action, on new strategy

November 14, 2012

Federal Reserve leaders had a lively debate at their last meeting over whether and how  to announce specific levels of inflation and unemployment that would lead them to hike interest rates, but couldn’t reach agreement as they got into the knotty details of what those thresholds would be and how exactly they would work.

That picture, of lots of talk but no action, emerges from minutes of their meeting Oct. 23-24, which were released Wednesday afternoon. Leaders of the central bank were clearly intrigued by the idea, first proposed by Chicago Fed President Charles Evans and most recently endorsed by vice-chair Janet Yellen, of telling the world what unemployment rate or inflation level would prompt them to start seriously thinking about hiking interest rates from their current ultra-low levels.

Fed Chairman Ben S. Bernanke and the FOMC discussed policy "thresholds" extensively at their last meeting. AP Photo/Gerald Herbert.

Evans has argued that the Fed should pledge to continue its easy money policies until either inflation hits 3 percent or unemployment reaches 7 percent; Minneapolis Fed President Narayana Kocherlakota has suggested that the Fed could announce it intends to keep easy money policies in place until inflation reaches 2.25 percent or unemployment reaches 5.5 percent.

And they seem to have company among their Fed colleagues that the basic idea is appealing, at least in theory. Members of the Federal Open Market Committee “generally favored the use of economic variables,” instead of calendar dates, in their attempts to guide the markets as to the future direction of Fed policy, according to minutes of the meeting. The hope is that this would make financial markets and decision-makers in the economy more confident about the economic future and better understand how to interpret the future of Fed policy.

But the minutes also reveal the litany of problems that the officials see in moving to such a strategy.

“Several participants” were concerned that these thresholds could confuse the public by making it look like the Fed leaders focus only on a couple of economic numbers, like the unemployment rate and inflation measures, in setting monetary policy, rather than the full range of evidence about where the economy is going. Others worried that people might perceive the numbers as ironclad triggers of interest rate hikes or as the longer-run economic goals the Fed is shooting for. Fed leaders who have advocated the new strategy have invariably referred to the numbers as “thresholds,” rather than “triggers” or “targets,” for exactly that reason.

They also had practical concerns, such as whether to adopt specific numbers like those advocated by Evans and Kocherlakota, or to give more qualitative thresholds. Another issue was whether it should be framed in terms of actual inflation results or the Fed’s projections of future inflation.  Should the Fed  “supplement thresholds expressed in terms of the unemployment rate and inflation with additional indicators of economic and financial conditions that might signal a need” to raise rates either sooner or later?

Add it all up and there appeared to be too many open questions, and too much disagreement, to reach any agreements. “At the conclusion of the discussion, [Chairman Ben S. Bernanke] asked the staff to provide additional background material, taking into account the range of participants’ views.” That suggests that Fed leaders will return to the table at their next meeting, Dec. 11, with a renewed focus on the issue. Yellen’s comments on the topic in a speech Tuesday show there is enthusiasm for the strategy at the highest level, and Bernanke will have an opportunity to share his views in a speech Nov. 20 in New York.

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Dylan Matthews | November 14, 2012