by Calculated Risk on 9/22/2012 10:56:00 PM

A few excerpts from a research note by Goldman Sachs chief economist Jan Hatzius:

• ... We now view the Fed as following a looser version of the “threshold rule” championed by Chicago Fed President Charles Evans.

• What are the thresholds? We read the committee as signaling that the federal funds rate will not rise until the unemployment rate has fallen to the 6½%-7% range. The corresponding threshold for the end of QE3 may be in the 7%-7½% range.

•These implicit commitments are undoubtedly subject to an inflation ceiling ... may be a year-on-year core PCE reading of 2½%-2¾%.

• All this is subject to change ... The flexibility to respond to such changes is a key advantage of keeping the thresholds implicit rather than explicit.

• ... Under the committee’s economic forecasts, we estimate that the funds rate would stay near zero until mid-2015, while QE3 would run through mid-2014 and total $1.2trn.

• Under our own economic forecasts, we estimate that the funds rate would stay near zero until mid-2016, while QE3 would run through mid-2015 and total just under $2trn.

• If the recovery continues to disappoint, additional steps are possible.

The keys will be to watch the unemployment rate and several core measures of inflation. As of August, the unemployment rate was at 8.1% - and mostly moving sideways - and core PCE for July was up 1.6% year-over-year (plenty of room to the 2½%-2¾% range).

Earlier:
• Summary for Week Ending Sept 21st
• Schedule for Week of Sept 23rd