Reason Foundation

The Federal Open Market Committee released its November statement yesterday. There was little change from the September statement, and interest rates remain at 0 to .25 percent. However, the FOMC did indicate what it was watching in terms of inflation indicators. We see it in the changed language between statements:

September 23: "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

November 4: "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

The statements are exactly the same, with the addition of this line: "including low rates of resource utilization, subdued inflation trends, and stable inflation expectations." Those three things are what the Fed is watching, and if there is a significant swing in those categories, we can probably expect a rate change. WSJ writes:

The Fed has been running full throttle for an entire year, while the financial panic has subsided, credit markets are healing, and third quarter GDP growth was 3.5%. The Fed is nonetheless focused principally on the "output gap," by which it means "low rates of resource utilization" and the high jobless rate. As long as the economy isn't going at full capacity, the governors believe, there's no danger of price increases and thus we need "exceptionally low levels of the federal funds rate for an extended period."

(Also, see here for the Goldman analysis of these indicators.)

The FOMC at present remains convinced inflation will remain subdued. The November statement repeats September's position verbatim:

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Time will tell if they are right, and if Bernanke can keep his word that he's got inflation under control. But even if inflation isn't about to rise, we are creating an artificial subsidy for companies right now by maintaining cheaper than would be credit.