Thresholds versus Triggers

Fed Chair nominee Janet Yellen believes that the Fed will keep rates at zero long after the 6.5 unemployment threshold, according to news reports.  Yellen made the comments responding to an inquiry by Massachusetts Senator Elizabeth Warren about monetary policy. The question then is what does this threshold mean and how credible is it.

Here is the key line in what Yellen wrote Warren: “Monetary policy is likely to remain highly accommodative long after one of the economic thresholds for the federal funds rate has been crossed.”
At present, the Fed has two thresholds, one for unemployment and one for inflation. The unemployment threshold is 6.5% and the inflation threshold is 2.5%. I assume that Yellen said policy will remain accommodatve even after one of the thresholds is met because ...


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