Evans Rule in Place at the Federal Reserve

Posted on 12/12/2012

The Federal Reserve has spelled out specific guidelines for the inflation and unemployment rates that will trigger interest rate hikes. Easy monetary policy will remain until unemployment touches 6.5% or if inflation looks to surpass 2.5%. This 2011 proposal by Chicago Federal Reserve President Charles Evans has been embraced and gained support from other Federal Reserve officials over the 2012 year. The labor participation rate is the largest marginal driver for the unemployment rate.

Over time, the U.S. unemployment rate may lower as the ongoing collapse of the labor participation rate continues to sink.

This is a major change as the Federal Open Market Committee (FOMC) seems to have ended the practice of discussing future policy based on a calendar framework or arbitrary date.

In addition, the Federal Reserve boosts quantitative easing by buying US$ 45 billion worth of monthly treasury purchases. This is on top of the US$ 40 billion worth of monthly mortgage-backed bond purchases started in September 2012.

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