1. Fed Meeting Jan 24-25, 2012
R. Clarida
January 30th 2012

2. What the Fed Did at January 24-25th Meeting
Extended its expectation that rates will remain ‘exceptionally low’ from the ‘mid -2013’ horizon announced in the August 2011 Statement to ‘late 2014’.
“The Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and 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 late “
Kept the door open to do another round of QE
“The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. “
Reached ‘broad agreement on principles regarding its longer-run goals and monetary policy strategy’
An Explicit Inflation Forecast Target of 2 Percent in the Longer Run
“The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.”
A Dual Mandate to Minimize Deviations of the Unemployment Rate from its Long Run ‘Normal’ Level
“The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time….estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.”
Published FOMC members’ individual forecasts of ‘optimal’ path for Funds rate

4. This is important!

5. The Forecast Charts for Policy Path
Year of first Hike under appropriate policy as defined be each member
Note that each dot is a forecast of where that Fomc member thinks the funds rate would be at the date under the policy he thinks would be appropriate . It does not represent where each member thinks the Fed will be setting rate at that date.
Note that this implies that Fed longer run forecast of neutral real short rate is 2 percent! Fed defines longer run as ‘perhaps 5 to 6 years’. But this is not yet reflected in Treasury/swaps forwards. 3m Treasury 5 years forward is at 2.16!

6. Inflation Targets Aren't Created Equal

7. 5y 5y Bei: Fed Has to Love this Chart Right Now

8. 5y 5y Tips aren’t pricing in a long run Real Policy Rate of 2 percent

12. Policy Rate Forecasts are Not a Commitment