In September I wrote that I expected the Fed to establish a lower bound for its inflation threshold as one of its next moves. The rationale was two-fold. First, inflation is undershooting and the Fed needs policy space to deal with unwanted disinflation. Second, a deflationary threshold would give wiggle room that the unemployment rate threshold does not. According to the Wall Street Journal this idea is in play at the Fed.
Here’s what the Wall Street Journal’s Jon Hilsenrath writes:
The Fed has said for months it won't raise short-term interest rates from near zero until the unemployment rate, which was 7.3% in October, falls below 6.5%, as long as inflation doesn't move above 2.5%. Fed officials believe the promise, known as "forward guidance," helps hold down long-term borrowing r...
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.