While the Federal Open Market Committee policy statement is "consistent with an appropriately accommodative monetary policy strategy," the panel leaves "uncertainty about the Committee's likely course of policy choices when the recovery is more advanced," according to Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.
"The Committee could better achieve its policy goals if it were to reduce this uncertainty through communicating more information about its likely reactions to additional economic eventualities," Kocherlakota said in a statement Monday. "In my view, the Committee could better achieve its goals by augmenting its communications to provide the missing clarity."
Kocherlakota used the following example: "the Committee has not described how it will set its fed funds rate target when the unemployment rate has fallen below 6.5% but remains above 5.5%-a period of time that I currently expect to last about two years."
The Fed should continue buying assets "at least until" the jobless rate is below 7% and the medium-term inflation outlook is less than 2.5%, while leaving the Fed funds rate alone until the jobless rate is under 5.5%," he said.
"In both cases, I am describing thresholds, not triggers. Thus, depending on economic conditions and assessments of policy effectiveness, it may be appropriate for the Committee to buy additional assets even after the unemployment rate falls below 7%. And, depending on economic conditions, it may be appropriate for the Committee to keep the fed funds rate extraordinarily low even after the unemployment rate falls below 5.5%."
Calling asset purchases "a relatively novel monetary policy tool," Kocherlakota said it is appropriate to consider not using this tool "before the economy has fully normalized."
In Federal Reserve Board Chairman Ben Bernanke's press conference, he referred to the FOMC's "expectation that it will keep buying assets through mid-2014, when the unemployment rate is anticipated to be in the vicinity of 7%."
Kocherlakota explained that his strategy "says specifically that the FOMC will keep the fed funds rate extraordinarily low over that time frame (as long as the inflation conditions are satisfied). This additional clarity about future policy actions will tend to push downward on a variety of market interest rates and provide needed current stimulus to the economy."
