The Fed Did Discuss Adjusting the Evans Rule

This morning, I laid out my thoughts on the Fed changing or even ditching the Evans Rule (the threshold of 6.5% unemployment before raising short-term interest rates). It turns out, they did discuss this issue in December:

Participants also considered the potential for clarifying or strengthening the Committee’s forward guidance for the federal funds rate.

In general, participants who favored amending the forward guidance saw a need to more fully communicate how, if the unemployment rate threshold was reached first, the Committee would likely set monetary policy after that threshold was crossed.

A number of participants pointed out that the federal funds rate paths underlying the economic forecasts that they prepared for this meeting, as well as expectations for the funds rate path priced into financial markets, were consistent with the view that the Committee would not raise the federal funds rate until well after the time that the threshold was crossed. (Yep, that seems very much the case. – Eddy)

A few participants discussed the potential advantages and disadvantages of using medians of the projections of the federal funds rate from the SEP as a means of communicating the likely path of short-term interest rates.

Some worried that, if the Committee began to reduce asset purchases, market expectations might shift, and they wanted to reinforce the forward guidance to mitigate the risks of an undesired tightening of financial conditions that could have adverse effects on the economy.

In light of their concern that inflation might continue to run well below the Committee’s longer-run objective, several participants saw the need to clearly convey that inflation remains an important consideration in adjusting the target funds rate.

Participants debated the advantages and disadvantages of lowering the unemployment rate threshold provided in the forward guidance.

In the view of the few participants who advocated such a change, a lower threshold would be a clear signal of the Committee’s intentions and was an appropriate adjustment in light of recent labor market and inflation trends. (I agree.)

In contrast, a few others expressed concern that any change in the threshold might be confusing and could undermine the credibility of the Committee’s forward guidance. (But your credibility will also be hurt if you don’t adhere to your previous guidance.)

Most were inclined to retain the current thresholds for the unemployment and inflation rates and to instead provide qualitative guidance regarding the Committee’s likely behavior after a threshold was crossed.

So no change for now, but it’s on the radar. That’s a good thing.

Posted by on January 8th, 2014 at 2:38 pm


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