In the last FOMC meeting of the year, the Fed yet again provided more stimulus with two new easing initiatives. The first one was expected. That's more bond buying after Operation Twist ends. The second one wasn't expected until next year. In a surprise move, the Fed replaced the mid-2015 date with unemployment and inflation thresholds.
Here's how the Fed described the Operation Twist replacement in the FOMC statement:
The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.
And here's how the Fed described the new unemployment and inflation thresholds:
the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Only Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, voted against the policy. Lacker has been the lone dissenter at every FOMC meeting this year. According to the FOMC statement, Lacker "opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate."
The new unemployment and inflation thresholds probably don't change things much for those of us waiting for higher rates. Both indicate a long wait, and the wait may become longer if the fiscal cliff or other shocks weaken the economy. It's hard to believe it has been almost four years since the Fed first lowered the federal funds rate to near zero.
Later today, the Fed will be releasing its economic projections and the target federal funds rate projections. This will allow us to see a date that corresponds to a 6.5% unemployment rate. Also, Chairman Bernanke will be holding a press briefing in which he'll be discussing today's FOMC policy decisions. I'll update this post with news from the economic projections and from the press briefing.
Update 4:00pm ET: The Calculated Risk blog has a useful summary of the Fed's economic projections and Chairman Bernanke's press conference. The Fed's unemployment projections show an unemployment rate between 6.0% and 6.6% in 2015. So the expectations for rate hikes is still around mid 2015 when you consider the new 6.5% unemployment threshold in the FOMC statement. Also, out of the 19 FOMC members, 13 of them project policy firming starting in 2015.
Inflation is also a factor in the Fed's decision about policy changes, but the Fed specified "inflation between one and two years ahead" in its statement. As the Calculated Risk blog post warned "inflation could increase to 3% or 4% without an increase in rates, as long as expectations remain anchored and the outlook one to two years ahead is at or below 2 1/2%."
Finally, a reporter asked Chairman Bernanke if he would accept a third term as Fed chairman when his current term ends in January 2014. Chairman Bernanke provided no hints on his plans. A new chairman in 2014 would probably do little to change the Fed's policies. If the President has to nominate a new chairman, it's likely to be Janet Yellen who is considered more of an inflation dove than Bernanke.