The full FOMC statement for August 9 says that “low rates of resource utilization and a subdued outlook for inflation over the medium run” warrant maintaining current rates until “at least” 2013. Although perhaps not surprising, it is not a smart thing to do. So many things can happen, among which feed-forward into an economic system that we do not really grasp. So why outline the policy goal now for such a long time?
My opinion is quite a bit based on the thoughts of Stephen Axelrod, a very senior policy expert of the FED. He explained (in this excellent book of his: Inside the Fed) that he thinks such a pre-announcement policy is not a wise thing to do (p 157).
In general I think it is best all around for officials to avoid commentary about the future of rates they cannot directly control or are unwilling to control - that is, rates other than the funds rate. I also think it is best to avoid commenting on the probable future of rates they do control. In either event, they taint the information being conveyed back to themselves and other market participants by the behavior of rates. Also, and more dangerously, because of misinterpretations and unintended consequences, they risk causing reactions in businesses' and individual's spending and borrowing decisions that make the underlying economic and also financial situation worse rather than better for the economy and its future.
In short, the future is unknowable both to the Fed and to the market. Little seems to be gained, and much can be lost in the terms of the chairman's and the Fed's credibility and policy effectiveness, by getting into the mug's game of exposing policy intentions and wishes that may be both misinterpreted and in the end, as market conditions change, misleading.
So in my opinion Bernanke is heading into very dangerous territory now.
