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Joe Gagnon of the Peterson Institute e-mails in to say that Tuesday’s statement from the Federal Reserve’s Open Market Committee was actually a more momentous event than many observers have realized:

While it is not all I could wish for, I was very surprised by it and take much encouragement.

To make a conditional policy commitment for 2 years is a stunning reversal and unprecedented for a central bank as far as I know. Moreover, it does not mean (and they need to communicate this clearly) that they expect a continuation of less than 2 percent growth for the next two years. What it really means is that even if they get all the growth they expect (well above 3 percent for 2012 and 2013) that will not cause them to tighten policy. I think they should aim for 4 to 5 percent for two years, but they are probably not that aggressive.

Moreover, they clearly left the door open for QE3. I think they did not want to be stampeded by the stock market into a hasty move.

Most important, Bernanke showed himself willing at last to defy the hawks. They will never have enough votes to stop Bernanke from doing what he wants. Everyone on the FOMC knows that now.  Yellen, Dudley, Raskin, Tarullo, Evans, and probably Duke will all support the Chairman if and when he wants to do more.<span>   </span>

Yesterday, Gagnon <a href="http://www.washingtonpost.com/blogs/ezra-klein/post/what-the-fed-should-do/2011/07/11/gIQAZQhj4I_blog.html">offered up his thoughts</a> on what the Fed should do.

Brad Plumer

The Washington Post

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