Krugman is unimpressed by the Fed statement

The Fed didn’t announce a new policy. And despite what some press reports said, it didn’t even commit to keeping rates low; all it did was say that if the economy stays weak, rates will stay low — well, duh

And three members of the FOMC dissented even from that!

Its worth looking at the wording of the statement and the dissent. The statement read

The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

I read that as Fed speak for we intend to keep interest rates low for two years. Not, if we need to we will. But, we will.

The dissent read

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period

Why is this important. Because the difference between extended period and mid-2013 highlights the significance of the Fed wording. Had this simply meant “so long as appropriate” there really wouldn’t be a difference between extended period and 2013.

This statrment is rightfully viewed as a quasi-commitment by the Fed to keep interest rates at zero for two more years.

What you would want to see is the phrase “at least through mid-2013” repeated over and over in new statements and speeches. That will solidify the commitment.

Remember that the last thing you want to do as a central banker is hurt your credibility. So, repeating specific dates indicates that those dates have real meaning.

If the Fed were to begin to tighten its stance the first thing you would expect to see is the phrase “at least” removed from statements and speeches. Further tightening would move us to something phrasing like “possibly through mid-2013”

How the Fed frames the certainty of its statements tells you how tight the policy is.