Wednesday, December 12, 2012

Two Cheers for the Fed

Matt Yglesias is cheering the Fed's targeting of employment and inflation.

This is huge. With today's policy announcement, the Federal Reserve's Open Market Committee has stopped screwing around and started doing real expectations-based monetary easing.

The new policy is a version of the plan from Charles Evans that I wrote about in March. They've said that interest rates will remain low until unemployment falls below 6.5 percent or the inflation rate exceeds 2.5 percent. That is a softer and weaker form of monetary easing than Evans originally proposed, but apparently a meager inflation target is the price you have to pay politically to get this done. As I explained yesterday, this kind of strategy should be partially successful in getting corporate cash off the sidelines in a way that "certainty" and "confidence" won't. The higher inflation target makes cash-like safe liquid investments look slightly less reasonable than they did yesterday, while the faster real growth implied by the unemployment target makes real investments in increased capacity look better.

If I had my druthers, I'd have taken a more aggressive action involving a permanent increase in the inflation target back up to a Reagan/Volcker era 4 percent, but this is good stuff. As I wrote a month ago, we're getting a new FOMC present for Christmas.

Less than employment hawks would like, but better than nothing. If this works, and the Republicans don't crash us at the bottom of the fiscal & debt ceiling cliffs, then it will be time to mock the doomsayers. Of course if it doesn't, maybe it will be doom after all.