Newsroom

December 13, 2012

FOMC targets to guide future action

The Federal Open Market Committee left its federal funds rate target unchanged Wednesday but named specific targets for inflation and unemployment that will guide future policy decisions, a move NAFCU Chief Economist David Carrier said gives credit unions a helpful planning tool.

With Wednesday's action, the FOMC said it leaving its fed funds rate target at a range of 0 to 0.25 percent. It says it expects this will be the appropriate course to maintain as long as:

  • unemployment remains above 6.5 percent;
  • inflation stays within a half a percentage point above the panel's 2 percent long-run goal over the next one or two years; and
  • longer-term inflation expectations continue to be "well anchored."
David Carrier - sm
David Carrier

Carrier said Wednesday's announcement of specific inflation and unemployment targets was historic and speaks to the ongoing debate about whether more or less transparency can help the Fed achieve its objectives. Some argue that more transparency helps markets and investors, and that helps the economy, he said, but others say less transparency gives the Fed more flexibility to respond to changing conditions.

In the end, Carrier said, the panel believed it had to name its targets because of the Fed's dual mandate to maintain both price stability and low unemployment. He said the Fed has achieved the first but not the second, and this "was simply the next tool" in their toolbox. "Some say it's the last," he continued. "In any case, credit unions now know with certainty how long the Fed plans to maintain these historic low interest rates, and they should plan accordingly."

The committee also noted plans to begin purchasing longer-term Treasuries after its maturity extension program expires at year-end. For more, see NAFCU's Macro Data Flash report (login required).