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The Fed Puts on Its Superman Cape and Decides to Fix Unemployment

To the rescue! Photo: SAUL LOEB/AFP/Getty

A very important (and, for noneconomists, a very boring-sounding) thing happened at the Federal Reserve today, one that marks the clearest sign in years that our nation’s top monetary policy-makers realize there’s an unemployment crisis in America and are trying to do something about it.

You can cruise over to the FOMC’s website for the official statement, if you want. Binyamin Appelbaum has a reasonably clear explanation here. But if you’d rather get the plain-English version, here is the gist of what happened:

On a very basic level, the Federal Reserve is supposed to stabilize prices and keep unemployment low. Its primary means for stimulating a bad economy are (a) lowering interest rates, and when that fails, (b) buying Treasury bonds and other stuff from banks, a program known as “quantitative easing.” Recently, as you may have noticed, the economy has been improving, but it could be better. Unemployment has stayed pretty high, and since interest rates are basically at zero already, the Fed has been puzzling over what to do about it, besides buying more stuff. (It is already buying a lot of stuff.)

Today, the Fed’s open markets committee announced its grand plan. It promised to keep buying Treasury bonds and other assets from banks (“QE3”) for a while and keep short-term interest rates near zero (even after it stops buying stuff) until the unemployment rate improves. More important, it defined for the first time what “improves” means — if the unemployment rate drops to 6.5 percent or lower from its current level of 7.7 percent. Until that happens, the Fed will keep rates low, unless the inflation rate climbs above 2.5 percent.

This policy is known as the “Evans Rule,” named after Chicago Fed president Charles Evans, who first proposed it last spring. The idea behind Evans’s proposal was that the Fed can send a strong message that it cares about high unemployment by first defining “high” and then promising to keep stimulating the economy until the unemployment rate drops below that concrete mark. And the Fed’s decision to adopt Evans’s proposal is a major step. As Appelbaum says, it’s “the first time that the Fed had tied the duration of an aid program solely to its economic objectives, omitting any end point.”

Matt Yglesias thinks the Evans Rule will get corporations to stop hoarding their cash and start spending it. I think there’s a bit more to it than that. But either way, if you’ve been hoping that the guardians of our monetary policy would pay more attention to the country’s unemployment crisis, today is a good day.

The Fed Puts on Its Cape