+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

Fed Governor Introduces The 'Stein Rule'

Sep 26, 2013, 19:48 IST

REUTERS/Kevin LamarqueFederal Reserve Board of Governors member Jeremy Stein listens during an open board meeting at the Federal Reserve in Washington December 14, 2012.

Federal Reserve Governor Jeremy Stein is speaking today in Frankfurt, Germany on monetary policy.

Advertisement

In his speech, Stein said the Fed should tie tapering of quantitative easing directly to a specific labor market indicator, like the unemployment rate.

"My personal preference would be to make future step-downs a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period," said Stein. "For example, one could cut monthly purchases by a set amount for each further 10 basis point (0.1%) decline in the unemployment rate."

Perhaps if the Fed decides to implement this policy in the future as a form of forward guidance on the tapering timeline, it will become known as the "Stein Rule."

Last Wednesday, the Fed shocked markets with its decision to refrain from announcing the first tapering of the pace of monthly bond purchases it makes under its quantitative easing program. A reduction of $10-15 billion in the amount of purchases it makes each month was widely expected on Wall Street and among market participants.

Advertisement

On Friday, St. Louis Fed president James Bullard said in an interview with Bloomberg that the Fed shouldn't raise short-term interest rates if inflation is below 1.5%, and that a 1.5% inflation floor would "reassure markets" that have been swept up in turmoil as participants begin to anticipate a tightening of monetary policy. He also said that he would recommend increasing the size of the central bank's quantitative easing program if inflation were to fall below 1%, a scenario he said would have him "pretty concerned."

Bullard's remarks led Owen Callan, a fixed income dealer at Danske Bank Markets, to quip in a tweet that perhaps we've just seen the introduction of the "Bullard Rule."

The Fed currently offers forward guidance on the future path of its main policy rate based on the "Evans Rule," named for Chicago Fed president Charles Evans.

The rule, adopted by the Fed at the conclusion of its December 2012 meeting, dictates that the Fed won't consider raising short-term rates "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 a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article