Why We Shouldn't Feel Well-Guided

Today's FOMC statement was as expected on the quantitative easing (QE) side of policy. The Fed will continue to purchase $40 billion in mortgage-backed securities (MBS) per month, and will be purchasing $45 billion per month in long Treasury securities outright, rather than swapping short Treasuries for long ones.

There were some surprises (for me) in the change in forward guidance. Let's see what the statement says, so we can parse it:

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. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

The first part of this, is a trigger at at a 6.5% unemployment rate. Actually, it's not a trigger, as the 6.5% unemployment rate is just a necessary condition for tightening. The second part - the inflation trigger - is pretty weird. A second necessary condition for tightening is an inflation forecast -one to two years ahead - that exceeds 2.5%. Note the following:

(i) The FOMC is going to ignore actual inflation. Apparently that's irrelevant.
(ii) Whose forecast is this? You know whose. It's the Fed's own forecast. If you're paying attention to the Fed's forecasts, you'll understand that they basically make it up so that it's consistent with their own policy.

We're also told that inflation expectations becoming unanchored would be grounds for tightening. What is that supposed to mean? Then we're told that, of course, the Fed will look at everything, just as it always does.

If the goal was to provide a more precise statement about what will trigger a tightening of policy in the future, the FOMC has failed dismally. This statement is more vague than the last one, in October, which contained a calendar date.

What about policy after liftoff? We're told that the committee"...will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent." I'm worried that this is balanced like Fox News. The last reference to "balanced approach" I saw was in a speech by Janet Yellen. The balanced approach, as far as I can tell, represents a marked change in monetary policy, toward an activist approach rooted in the belief that short-run non-neutralities of money are a very big deal. The Fed has just told us that they care a lot less about inflation. They're losing sight of what their job is.