Yglesias cheers Charles Evans, President of the Chicago branch of the Federal Reserve, for proposing a shift in the Fed's approach to handling the economy:
Evans says that the Fed can guide these long-term expectations in two ways. First, what he calls “Delphic” guidance is a Fed observation that the future economy is likely to be weak and therefore future rates are likely to be low. What he calls “Odyssean” guidance, by contrast, is a Fed promise to keep rates low, giving investors and potential durables goods customers confidence that come what may, the low rate climate will continue into the future. The Fed’s current language is somewhat ambiguous between the two, with formally Delphic statements often receiving Odyssean interpretations in the press and Fed watchers in the media and the business community receiving clear informal guidance that the statements are meant to stimulate the economy.
Much of Evans’ paper is dedicated to attempting to mathematically disentangle the market reaction to recent Fed language shifts in order to demonstrate that Odyssean signals are being heard. The real meat of the argument, however, is that the Fed should clear the confusion up with a much simpler and clearer statement. Specifically, Evans wants the Fed to promise that it won’t raise rates until unemployment falls below 7 percent, unless inflation rises above 3 percent.
That’s solid Odyssean guidance. It tells you that if you were at all considering investment in business equipment, structures, automobiles or the like, today would be a good day to take the plunge. Either nominal rates will stay low for a long time, or else the economy will recover unexpectedly quickly (turning your investment into a good value), or else the inflation rate will be unexpectedly high (reducing the real interest rate you pay). Either way, you want to invest today, and that should boost the economy.