by Bill McBride on 9/22/2012 10:56:00 PM
• ... We now view the Fed as following a looser version of the “threshold rule” championed by Chicago Fed President Charles Evans.The keys will be to watch the unemployment
• What are the thresholds? We read the committee as signaling that the federal funds rate will not rise until the unemployment rate has fallen to the 6½%-7% range. The corresponding threshold for the end of QE3 may be in the 7%-7½% range.
•These implicit commitments are undoubtedly subject to an inflation ceiling ... may be a year-on-year core PCE reading of 2½%-2¾%.
• All this is subject to change ... The flexibility to respond to such changes is a key advantage of keeping the thresholds implicit rather than explicit.
• ... Under the committee’s economic forecasts, we estimate that the funds rate would stay near zero until mid-2015, while QE3 would run through mid-2014 and total $1.2trn.
• Under our own economic forecasts, we estimate that the funds rate would stay near zero until mid-2016, while QE3 would run through mid-2015 and total just under $2trn.
• If the recovery continues to disappoint, additional steps are possible.