This seems to be the theme building in Federal Reserve speeches and communication. Ben Bernanke today.

To sum up: A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed.  Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force.  Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.  Notably, an examination of recent deviations from Okun’s law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009.  To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.

Rate are improving, but “conditions remain far from normal” in the level.

This links well with “economic conditions are likely to warrant an exceptionally low level for the Federal Funds rate”

We are beginning to see a strong implicit recognition that the relevant economic conditions are not the growth rates of real variables but the level of those variables, particularly employment.

Fed officials appear unwilling at this point to make similar statements about the price level, though we have seem some significant table-setting by Charles Evans in that regard.

Though I would generally regard this as a slow and steady move to shift expectations, it could also be regarded as “Odyssean” guidance, in that as the Fed takes more and more implicit responsibility for the level of employment it is providing ammunition to its dovish critics.

This in turn changes the Fed’s loss function so that an attempt to raise rates early is more difficult.

I should note the dynamics of a body that has some but limited tools to alter its own loss function are fascinating in-and-of-themselves.

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