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Might the Federal Reserve tie policy to employment?

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The number two official at the U.S. Federal Reserve, Vice Chair Janet Yellen, has thrown her weight behind a major change in Fed policy.

The issue at stake is how the central bank should schedule its stimulus actions. Currently, the Federal Reserve has promised to keep interest rates low for a certain amount of time, until 2014 for example. Instead, Yellen said she supports tying monetary policy to specific economic outcomes, like bringing unemployment down to 7 percent.

“They think by tying their policies explicitly to goals on employment and inflation,” says Julia Coronado, chief economist at BNP Paribas, “the public will believe in their commitment and act accordingly.”

Yet there are Fed members and watchers who are uncomfortable with further institutionalizing stimulus policies with such untested measures. Nonethless, Coronado believes it is very likely that the Federal Reserve will move to the new economically-pegged schedule.  

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