Federal Reserve Chair Janet Yellen called an unscheduled meeting of policy makers on March 4 to discuss altering the Fed’s pledge to hold borrowing costs at record lows at least as long as unemployment exceeds 6.5 percent.
Yellen convened the videoconference after joblessness fell faster than forecast and with just two weeks before leading her first scheduled meeting of the Federal Open Market Committee as chair, according to meeting minutes released today in Washington.
“They anguished over how to change the wording” describing the criteria for any increase in the main interest rate, said Brian Jacobsen, who helps oversee $241 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “This Fed doesn’t want to rock the boat. The more predictable, the better.”
Fed officials on March 4 agreed the existing 6.5 percent threshold “was becoming outdated as the unemployment rate continued its expected gradual decline,” the minutes show. The jobless gauge slumped to a five-year low of 6.6 percent in January and was 6.7 percent in February, the freshest labor market data available by the time of the videoconference.
“Most participants felt that the quantitative thresholds had been very useful in communicating policy” when employment was more elevated, yet with the economy getting closer to maximum employment, guidance should emphasize “a broader set of economic indicators,” according to the minutes.
On March 19 the FOMC scrapped the unemployment threshold, saying in a statement after a two-day meeting that it will look at a wider range of data when considering when to increase borrowing costs.
Even as they changed the FOMC statement, several committee participants at the March 18-19 meeting voiced concern Fed forward guidance could be misinterpreted, saying a change in their forecast for the main interest rate exaggerated the likely speed of tightening, the minutes show.
“Several participants noted that the increase in the median projection overstated the shift in the projections,” the minutes of the March 18-19 FOMC meeting showed. Some expressed concern the rate forecasts “could be misconstrued as indicating a move by the committee to a less accommodative reaction function.”
Fed officials, in forecasts released last month with the policy statement, upgraded projections for gains in the labor market and predicted the main interest rate will rise to 1 percent by the end of 2015, higher than previously forecast.
Yellen, in a news conference following the gathering, played down the importance of the interest-rate forecasts, which are represented as a series of dots on a chart, saying the committee statement is more important.
“These dots are going to move up and down over time,” she said. They moved up “ever so slightly,” she said. “The committee’s views on policy will likely evolve.”