Federal Reserve to Keep Interest Rates Low Until Unemployment Rate Falls to 6.5%

[Frodo]

Fed ties stimulus to jobs, inflation in unprecedented steps to bolster economy

By Zachary A. Goldfarb,
Updated: Wednesday, December 12, 3:34 PM

The Federal Reserve announced Wednesday that it will take unprecedented steps to bolster the economy, saying it will continue to stimulate growth until the unemployment rate falls to 6.5 percent or the inflation rate reaches 2.5 percent. The Fed said it did not expect unemployment to reach that benchmark until 2015.

It was a historic move that for the first time explicitly spells out the Fed’s goals for the nation’s economy and how it will respond to changing conditions.

The Fed says it will also begin buying $45 billion in Treasury bonds per month, on top of $40 billion per month it is already buying in mortgage bonds. The measures come as the nation braces for a possible recession if Congress and the White House do not reach a deal to avert a series of tax increases and major spending cuts set to go into effect at the end of the year.

[King]

Sounds reasonable.

[Simfan34]

Sounds reasonable.

I'd say somewhere around 6.75%, maybe 7% at most would be better, but this is hardly worth raising ones hackles about.

[opebo]

It is kind of funny how very constrained they are.  There is literally no limit to the number of zeros they type into the computer - the idea that there would be anything so much worse about typing in 400 billion instead of 40 billion each month is.. dubious.

[© tweed]

It is kind of funny how very constrained they are.  There is literally no limit to the number of zeros they type into the computer - the idea that there would be anything so much worse about typing in 400 billion instead of 40 billion each month is.. dubious.

'constrained' or 'restrained'?

[🐒Gods of Prosperity🔱🐲💸]

Seems like there'd be a downside to having near zero interest rates for the better part of a decade (?)

[SPC]

Seems like there'd be a downside to having near zero interest rates for the better part of a decade (?)

[○∙◄☻¥tπ[╪AV┼cVê└]

Seems like there'd be a downside to having near zero interest rates for the better part of a decade (?)

They did say they'd stop it if inflation exceeded 2.5%.

[SPC]

Seems like there'd be a downside to having near zero interest rates for the better part of a decade (?)

They did say they'd stop it if inflation exceeded 2.5%.

I was using hyperbole of course. However, it will be too late to stop by that time. Money creation first affects those that first receive it (e.g. banks, capital goods) and takes time to affect the rest of the economy (e.g. consumer goods and wages). By the time inflation is detectable in the Consumer Price Index (which itself is already manipulated downwards), the damage will already have been done. Considering the Fed has had an easy money policy for the past four years, inflation will be very difficult to avoid once banks make loans like they would during a boom period.

[King]

Seems like there'd be a downside to having near zero interest rates for the better part of a decade (?)

Yes, but there's also a downside to raise interest in a economy that's down on its GDP goals.  We should have raised interest rates, taxes, and cut spending in 2004-2007 but failed.  Overcompensating for those mistakes now isn't helpful.

[opebo]

inflation's just a bogeyman, guys.

[🐒Gods of Prosperity🔱🐲💸]

Seems like there'd be a downside to having near zero interest rates for the better part of a decade (?)

Yes, but there's also a downside to raise interest in a economy that's down on its GDP goals.  We should have raised interest rates, taxes, and cut spending in 2004-2007 but failed.  Overcompensating for those mistakes now isn't helpful.

I think interest rates did rise during most of that period.

[Person Man]

inflation's just a bogeyman, guys.

At this point in History, I definitely agree with you. Inflation is at 1.8% and yet, you would think its 8.1% the way Republicans are whining about the debt ceiling and the deficit. Never has such a non-issue become such a big thing. I would be very happy with inflation being a little less than two points higher if unemployment was a little more than two points lower.

3.6% CPI and 5.4% Unemployment ...perhaps 3.1% GDP per Quarter growth (just a little faster and more consistent than now)  would actually be a temperate economic environment.

[Beet]

I agree that unemployment is a bigger problem than inflation right now, but the official CPI is understated because asset prices still are not included. Particularly, housing prices.

[Person Man]

I agree that unemployment is a bigger problem than inflation right now, but the official CPI is understated because asset prices still are not included. Particularly, housing prices.

Then again, asset prices aren't included because that just means more money for you to buy other things that are inflating at the CPI (provided you cnn liquidate them). Then again, if housing is making a backdoor full-fledged reovery, that means that you might have to be a six-figure household (a 10%er household or 5%er single)  to get a house unless you are willing to settle for a shack, a house in the ghetto or a shack in the ghetto.

[Mr.Phips]

Seems like there'd be a downside to having near zero interest rates for the better part of a decade (?)

Yes, but there's also a downside to raise interest in a economy that's down on its GDP goals.  We should have raised interest rates, taxes, and cut spending in 2004-2007 but failed.  Overcompensating for those mistakes now isn't helpful.

I think interest rates did rise during most of that period.

They absolutely did.  They were raised in throughout 2004, 2005, and the first part of 2006 and they started being cut in 2007 when the subprime mortgage crisis started. 

[Link]

Yes, but there's also a downside to raise interest in a economy that's down on its GDP goals.  We should have raised interest rates, taxes, and cut spending in 2004-2007 but failed.  Overcompensating for those mistakes now isn't helpful.

You summed up my political/economic policy in one sentence.  If you cut taxes to stimulate a weak economy then you should raise them when when speculative bubbles start popping up.  We should have raised taxes higher in the nineties as well.  I would rather have seen that money go to pay the debt than go into the pets.com IPO.

[bedstuy]

Yes, but there's also a downside to raise interest in a economy that's down on its GDP goals.  We should have raised interest rates, taxes, and cut spending in 2004-2007 but failed.  Overcompensating for those mistakes now isn't helpful.

You summed up my political/economic policy in one sentence.  If you cut taxes to stimulate a weak economy then you should raise them when when speculative bubbles start popping up.  We should have raised taxes higher in the nineties as well.  I would rather have seen that money go to pay the debt than go into the pets.com IPO.

It's more complex than that though, right?  If you raise taxes in 1997, you're going to stifle both bad investments like Pets.com and good investments like broadband infrastructure.  You also have to choose between reducing the national debt and spending.  In hindsight, maybe we should have used the government surplus to build infrastructure or improve our healthcare system. 

Reducing the national debt too much is another thing to worry about.  Our financial system requires a good number of treasury bonds.  Tons of players in the financial system need to have that specific kind of asset on their books.   

Also, just as a matter of theory:  If a government project will create a net tax revenue increase in the future through new economic activity, above the cost of borrowing, why not deficit spend on that project even in good times?

[opebo]

If you raise taxes in 1997, you're going to stifle both bad investments like Pets.com and good investments like broadband infrastructure.  You also have to choose between reducing the national debt and spending.  In hindsight, maybe we should have used the government surplus to build infrastructure or improve our healthcare system. 

Reducing the national debt too much is another thing to worry about.  Our financial system requires a good number of treasury bonds.  Tons of players in the financial system need to have that specific kind of asset on their books.   

Also, just as a matter of theory:  If a government project will create a net tax revenue increase in the future through new economic activity, above the cost of borrowing, why not deficit spend on that project even in good times?

I strongly agree with your spending-over-debt-repayment argument, though I think it is erroneous to assume that 'good' investments will be stifled by increasing taxes.  The motivations for investment are enormously greater during those 'good times', so that only truly confiscatory taxes would thwart them - just as even zero taxation will do nothing to motivate investment during times of slack/falling demand and deflation.

[bedstuy]

If you raise taxes in 1997, you're going to stifle both bad investments like Pets.com and good investments like broadband infrastructure.  You also have to choose between reducing the national debt and spending.  In hindsight, maybe we should have used the government surplus to build infrastructure or improve our healthcare system. 

Reducing the national debt too much is another thing to worry about.  Our financial system requires a good number of treasury bonds.  Tons of players in the financial system need to have that specific kind of asset on their books.   

Also, just as a matter of theory:  If a government project will create a net tax revenue increase in the future through new economic activity, above the cost of borrowing, why not deficit spend on that project even in good times?

I strongly agree with your spending-over-debt-repayment argument, though I think it is erroneous to assume that 'good' investments will be stifled by increasing taxes.  The motivations for investment are enormously greater during those 'good times', so that only truly confiscatory taxes would thwart them - just as even zero taxation will do nothing to motivate investment during times of slack/falling demand and deflation.

I just mean that to the extent that higher taxes will have an incremental dampening effect on the economy, the dampening will not just target things like Pets.com and thus will not fix the over exuberance of the bubble period.