So philosophically, this represents a conversion to the Evans criterion for rates and the Woodford/Krugman doctrine about monetary policy in a liquidity trap.
Substantively, however, there isn’t that much going on here. Basically, Bernanke is promising that the Fed won’t do anything stupid — specifically, that it won’t pull an ECB, and raise rates even though the economy is still depressed and underlying inflation is still low. As it was, however, few people expected the Fed to pull an ECB in any case. That’s reflected in the market reaction: rates actually rose, and expected inflation, as measured by the spread between nominal and real rates, went up only slightly.
Robert Waldmann Dec 12
“There is every sign that the Fed has given about all the forward guidance to bond traders that can be given. “
hate love to say I told you so, but I told you so.
OK Woodford and especially Krugman have always noted the limits of forward guidance — in particular given the difficulty of making promises about what future FOMCs will do when the current members are replaced. But they still stress forward guidance effect over portfolio balance effects (which will be minor in the case of QE IV which is based on purchases of long term Treasuries not agency issued MBS).
Yes it is better to light one small candle than to curse against the darkness, but cursing against the darkness is a lot more fun.