The FOMC issued their press release and statement of long-run goals and policy strategy last Wednesday, January 25. These forms of monetary policy are some of the first in the increased transparency campaign. This next one is a game changer:
“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.”
Why does this matter? Some unemployment in the economy is necessary, this is called the natural rate of unemployment, which has always been 4-5%. This statement is a signal that the Fed is adjusting for a higher rate of natural unemployment… get used to it. At least we are only 2.5% off.
“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 2014.”
This is why the stock market has been up lately. I am really curious to see how much of an impact these Fed transparency changes, alongside the euro crisis, will have on the capital markets over then next 6-12 months. Also, Lloyds Bank just raised a $2 billion unsecured note at 315 basis points. This is a positive sign of weaker banks increasing activity in the markets.