From the FOMC’s latest statement:
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, 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 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. […]
Arguments regarding credibility and how difficult it is to earn in the world of central banking are often brandished about. Central bankers often imply that it’s the most dear and precious thing, and that it should not be squandered at any cost. The Federal Reserve has a lot of said credibility insofar as they are really good at fighting inflation. But that’s where the problem presents itself: that inflation fighting credibility comes at the cost of unemployment fighting credibility (it doesn’t have to, and there are examples of this, but that’s been the popular policy stance in the U.S. and Europe).
Many observers expected a more hawkish stance from the Fed following the positive news of the past few months; that qualifies as bad central banking to me and displays a lack of the appropriate kind of credibility. If they’re going to make explicit remarks such as keeping rates near zero through 2014, which I think they should continue to do, they shouldn’t find it acceptable that people second-guess them. Especially now, when expectations are the primary policy tool! I would find it mighty troubling that an unambiguous and neutral statement–by the Fed’s standards–was interpreted to be good news simply because the bad decisions that were expected didn’t materialize.