michael woodford, who by the way is my former colleague and co-author and friend, so i know him quiteell, know his work quite well. i think actually the thrust of his research is that forward guidance, communication about future policies, in fact, the most powerful tool that central banks have when the interest rate is close to zero. he advocates policies like nominal gdp that would essentially require credibility lasting many years. the implication being that the fed would target the nominal level of gdp and promise to do that for many years in the future, even if inflation rose as part of that policy. so his own perspective is that credibility, is the key tool that central banks have in order to get traction at the zero lower bound. whether we have the credibility to persuade markets that will follow through is an empirical question. the evidence, which i discussed recently, is when we've announced extended guidance that financial markets have responded to that, that private sector forecasters have changed their estimates of what unemployment and inflation will be when the fed begin

you recently have this guy called michael woodford, a really important monetary economist, who's come out and said we need the fed to engage in demand management and we need clear signals for the fed over the long term. so having a burst of qe here or there isn't really going to do it. we need a long-term commitment that the fed is going to send clear signals that as long as the economy is really weak we're going to take action. the problem is you still have a lot of folks, particularly hard money poppopulists. who are saying this is dangerous, this is too much discretion. >> right, they don't like it. >> exactly. you have some conservatives who disagree. so this is a really open question it and my own view is that we really need monetary stimulus. does it help the president? probably not. if it's this random grab bag. if ben bernanke sends a clear signal, it could help the country and sure it could help the president in the short term too. >> in a sense, sympathize with the man. congress could you please do it, because i don't have the most effective tool. and he gets stuck doing it.

. >> there have been concerns raised, questions raised, by people like: via professor michael woodfordut the credibility to the federal funds rate, the idea being that it is conditional, it is not really convincing and does not provide the kind of confidence you referred to. in this latest statement, you removed some of that conditionality and particularly struck by the statement that the committee expects a highly stance of monetary policy will remain appropriate for a considerable amount of time after the economic recovery strengthens. i assumed that was done to make your forward guidance more credible. yet the question remains whether, you know, as the economy picks up steam, whether it will really follow through and keep rates low or whether you will do as the fed has always done and begin to raise the funds rate. >> well, that is an important question. michael woodford, who, by the way, is my former colleague and co-author and friend, i know him and his work quite well. i think, actually, the thrust of his research is communication about future policies, the most powerful tool tha

that comes directly from an academic paper delivered at jackson hole by michael woodford. what's happening here is the federal reserve is changing what we call its reaction function. how it will react with policy to incoming data. essentially what the fed is saying is we're going to kind of ignore incoming better data and we're going to stick to our guns of remaining easy. that's a huge change for a central bank. maybe a huge change in central bank history. finally, the guidance extended to mid-2015. one more thing. the politics of this, if you concentrate on mortgage-backed securities, how does anybody step forward and say, you know what? i'm not in favor of lowering people's mortgages. that's maybe why one aspect of the policy right there. >> that's fascinating, things that they are talking about down here are just what you said. that is politically it does give the fed a little bit of cover to some extent because they are talking about the mortgage-backed issue. but also the use of the word "significantly" and that phrase where they said they would be accommodative well

there is interesting research by michael woodford who presented in jackson hole you could get where youd to go simply by changing its forward guidance. >> let me ask you a question. >> did you understand what i just said? >> yes but i'm thinking about something else. >> i look at him and -- >> we had richard fisher and he's going to be back, but we had some really smart people, people involved with this. >> was that richard fisher and some really smart people or richard fisher in addition to. >> all together in the same boat saying that to categorically say that all this qe has not at different points inflated commodity prices, they have said absolutely that they think there's a linkage. i saw something last week, erin burnett happened to mention that "the huffing post" fact checkers need fact checking. they're full of crap. they lie more than the people -- the lead story was that she makes fraudulent, false statements, and i read, i go wow, what did she do? she must have screwed up. all she did was tie some of the commodity inflation to qe3 and quoted paul krugman and this other idiot,

my time covering the federal reserve which is longer than a decade now an academic paper from michael woodfordt at jackson hole, we talked about it, become policy in less time because now when bernanke is giving us the forward guidance to say even when the recovery begins, now admittedly they've been talking about this for a while but woodford crystallized it in the paper lsats don't really work. what works in nonconventional policy is forward guidance. >> go ahead. >> forward guidance, telling the market that when things improve, we will act differently. changing the reaction function, that was the theory in woodford's paper and now bernanke essentially made it policy. >> i know we looked at the dollar index and it was higher. when we looked a couple hours ago it was up against things like the swiss franc and the yen, still down against the euro. at this point 1.30 but it's above 1.30 still. >> i want to make one quick comment on evans. i thought evans was emphasizing the defensive nature of this move more so than the positive nature of it. there is a balance in his speech but he basically se