But beyond that, the Fed could also try to reassure markets that it was not going to stop buying bonds or raising rates until the economy got much better. This is where communications and policymaking meet. Many of the world’s leading economic thinkers believe the Fed’s greatest power is in setting expectations,
especially when short-term interest rates are near zero.
According to this theory, convincing the public that interest rates will stay low for a long time can encourage consumers and businesses to do the things that make the economy chug along — borrowing, buying and hiring.
The Fed began to embrace this theory in late 2008, when it pledged to keep interest rates low for a while. But confusion remained about precisely how long this meant. It was not until last year that the Fed gave a date for when it might reverse course — initially 2013, then 2014 and then 2015.
This year, the Fed pushed further but with uneven results. In January, the Fed set a long-range inflation target of 2 percent, but markets weren’t clear if it was doing so out of a commitment to fighting inflation or to buy room to take more aggressive measures to combat unemployment. And many prominent economists ripped into the Fed, and Bernanke, for not taking even more aggressive action.
In the past four months, however, Bernanke did take significant new actions, although he tends to describe them in more iterative than dramatic terms. Beginning in September, the Fed said it would not only hold rates low until 2015 but keep them low after the economic recovery begins to strengthen. It also announced a new bond purchase program that was open-ended, solving a critique of previous programs — that they were date-certain to end.
And then Wednesday, the Fed outlined, with a greater degree of precision than ever before, the exact thresholds that might cause it to back away from ultra-low interest rates. But with Fed projections showing unemployment still well above 6 percent well into 2015, that won’t be anytime soon.