Clear communication is always important in central banking, and is especially important in the present circumstances when the economy requires further policy stimulus but the traditional tool of monetary policy, the target for the federal funds rate, is already effectively as low as it can go. (Since December 2008, the Federal Reserve's target for the federal funds rate has been between 0 and 1/4 percent.) Through "forward guidance," the Federal Open Market Committee provides an indication to households, businesses, and investors about the stance of monetary policy expected to prevail in the future. By providing information about how long the Committee expects to keep the target for the federal funds rate exceptionally low, the forward guidance language can put downward pressure on longer-term interest rates and thereby lower the cost of credit for households and businesses, and also help improve broader financial conditions.
Following their December 2012 meeting, Federal Reserve policymakers indicated that they anticipated that a target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as
>the unemployment rate remains above 6-1/2 percent,
>inflation between one and two years ahead is projected to be no more than 1/2 percentage point above the Committee's 2 percent longer-run goal, and
>longer-term inflation expectations continue to be well anchored.
Policymakers said they viewed these thresholds as consistent with their earlier date-based guidance, which stated that they anticipated exceptionally low levels for the federal funds rate were likely to be warranted at least through mid-2015.
The formulation of the forward guidance based on thresholds helps to clarify policymakers' intention to maintain accommodation for as long as needed to promote a stronger economic recovery in a context of price stability. And, by more clearly describing the connection between future monetary policy and economic conditions, forward guidance helps to make monetary policy more transparent and predictable to the public, thereby contributing to more rapid and automatic adjustments in financial markets to changes in economic conditions.
The 6-1/2 percent threshold for the unemployment rate should not be interpreted as policymakers' longer-term objective for unemployment. Most policymakers estimate the longer-run normal rate of unemployment is between 5.2 and 5.8 percent. However, because changes in monetary policy affect the economy with a lag, policymakers recognize that it will be necessary to begin moving away from highly accommodative policy before the economy reaches maximum employment.
Neither the unemployment rate threshold nor the inflation threshold should be viewed as triggers that would automatically lead to the immediate withdrawal of accommodative policy. Policymakers recognize that no single indicator provides a complete assessment of labor market conditions or the outlook for inflation. In addition, at its December meeting, the Committee indicated that once it has decided to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
extract from http://www.federalreserve.gov/faqs/money_19277.htm
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