Huge news out of the Federal Reserve

December 12, 2012

Charles Evans (Jin Lee/Bloomberg)

Federal Reserve policymakers unveiled a huge surprise this afternoon. The central bank has now laid out specific numbers for the inflation and unemployment rates that will lead it to start thinking about raising interest rates.

The Fed now expects to keep its easy money policies in place until unemployment rate reaches 6.5 percent or inflation looks set to exceed 2.5 percent. This is a full-on embrace of a proposal first outlined by Chicago Fed President Charles Evans in 2011 that has gained support from other Fed officials over the course of this year.

This is a big deal. The Federal Open Market Committee has abandoned its practice of talking about its future policy in terms of the calendar, such as pledging low rates until 2014, and instead making clearer 1) That the path of monetary policy will depend on the economy, not some arbitrary date, and 2) What exact economic conditions it would need to see to change course.

Perhaps more notable, the Fed is explicitly stating that it can envision letting inflation float above—but only a bit above—its 2 percent target as a price for getting the job market back on track.

After five years of remarkable monetary intervention to try to keep the U.S. economy afloat, we probably shouldn’t be surprised anymore by Chairman Ben Bernanke’s creativity, ability to guide his committee toward a decision, and willingness to take big steps that may be controversial. But this one was a surprise nonetheless.

Bernanke will have more opportunity to explain his thinking in a press conference that begins at 2:15 p.m. today.

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Dylan Matthews | December 12, 2012