- Economics March 19
In December 2012, the Federal Reserve announced the advent of the Evans Rule — that the Fed will keep the federal funds rate low either until unemployment falls below 6.5 percent, or inflation rises above 2.5 percent.
Today, Fed Chair Janet Yellen and the rest of the Federal Open Market Committee ditched that rule, announcing that the central bank will continue to keep rates low, even though unemployment is now at 6.7 percent, just 0.2 percentage points away from the target.
That's a great idea. Why? The Evans Rule was never really fit for the purpose; 6.5 percent is a totally arbitrary level. The Fed's mandate calls for "maximum employment and 2 percent inflation." The current employment rate is not — as I have argued — "maximum employment." The natural rate of unemployment is variable, and with growth still relatively weak, there is considerable room for more jobs growth. And with inflation remaining almost a full percentage point below the 2 percent target, there really is no need to tighten right now. More stimulus — and lower unemployment — is merited.
The other decision Yellen announced today — reducing the quantitative easing bond-buying programs by another $10 billion to $50 billion per month — was entirely to be expected given February's strong employment growth. Tapering is a gradual process. If unemployment fails to fall further, further tapering can be delayed or reversed. Or, if inflation picks up, tapering can be accelerated.
All in all, a good start for Janet Yellen.- -
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