Yellen Faces Forging Consensus on Fed’s Rate GuidanceJoshua Zumbrun
Federal Reserve officials agree that they must retool their guidance on when to consider raising interest rates. Chair Janet Yellen’s task is to forge a consensus on the new message from their disparate views.
Policy makers said they would soon have to modify their year-old commitment to keep their benchmark interest rate near zero until unemployment falls below 6.5 percent, according to minutes of their January meeting released yesterday. The minutes also showed a wide range of views on what should replace the threshold.
“They haven’t come to a consensus on what to do next and they’ll have to soon if the unemployment rate continues to fall the way it has,” said Antulio Bomfim, senior managing director at Macroeconomic Advisers LLC in Washington and a former Fed economist. “I don’t think many people were expecting us to already be” so close to the threshold.
Fed officials are in a bind. The jobless rate in January fell to 6.6 percent, even as other measures of labor-market health, such as the number of people forced to accept part-time work, show continued weakness. With Yellen this month describing the job recovery as “far from complete,” Fed officials will seek to maintain their commitment to keeping rates low, said Dan Greenhaus, chief strategist for BTIG LLC in New York.
“It seems pretty safe to say that they are close to doing away formally with the 6.5 percent threshold, and given their concerns about inflation, rate hikes are unlikely any time soon,” Greenhaus said.
Stocks remained lower after the minutes also showed support for maintaining the pace of cuts to the Fed’s bond purchases at about $10 billion per meeting.
The Standard & Poor’s 500 Index declined 0.7 percent to 1,828.75 yesterday in New York. The yield on the 10-year Treasury note rose three basis points, or 0.03 percentage point, to 2.73 percent.
Discussing a possible replacement for the unemployment threshold, some policy makers last month said they wanted new numerical guidelines, the minutes showed. Others preferred a “qualitative” approach of describing the general conditions that would prompt a rate increase.
Several want the new guidance to mention their concern that low rates could prompt financial-market instability. Others are seeking “greater emphasis” that they would keep rates low if inflation remains “persistently” below 2 percent. A gauge of inflation watched by the Fed showed consumer prices rose 1.1 percent in December from a year earlier.
St. Louis Fed President James Bullard, speaking to reporters after a speech yesterday in Washington, said he favors discarding the numerical threshold entirely.
“My preference would be, as we go through the threshold on unemployment, to just drop reference to these explicit thresholds and go back to a more normal policy,” Bullard, who doesn’t vote on the Federal Open Market Committee this year, said.
San Francisco’s John Williams said he also favors doing way with numerical thresholds.
“Our forward guidance should be aimed at providing the public with a good understanding of the key drivers of our policy decisions,” Williams said yesterday in a speech in New York. “This is best done by trying to explain how we are likely to react to economic developments, rather than putting down specific, quantitative markers for future policy decisions.”
The unemployment threshold is a form of forward guidance intended to help keep policy easy by assuring investors that rates will stay low until the economy improves.
In December 2012, the FOMC said it would hold the target interest rate near zero at least as long as unemployment remained above 6.5 percent, so long as forecasts for inflation do not climb above 2.5 percent.
Yet joblessness has fallen faster than Fed officials expected, in part because people have been dropping out of the labor force. When they first announced the threshold, most policy makers projected unemployment of 6.8 percent to 7.3 percent at the end of this year.
Last December, the committee strengthened its commitment, saying it would probably hold the rate near zero “well past the time” that unemployment falls below 6.5 percent. Since then, they have started to back away from the threshold, saying that the jobless rate alone isn’t an adequate measure of labor-market health.
Yellen, in congressional testimony this month, said policy makers “would be looking at a broad range of data on the labor market, including unemployment, job creation and many other indicators of labor-market performance.”
The minutes show that the FOMC debated “the reliability of the unemployment rate as an indicator of overall labor market conditions.”
Several members said broader measures of unemployment indicated “considerable labor-market slack.” One such measure, which includes part-time workers who want full-time employment, stood at 12.7 percent in January.
Even so, “a few” officials “raised the possibility that it might be appropriate to increase the federal funds rate relatively soon,” according to the minutes.
The committee showed more consensus over how to proceed with reducing bond purchases. Since succeeding Ben S. Bernanke on Feb. 3, Yellen has pledged to maintain his plan for “measured” cuts.
The minutes reaffirmed her view. Several policy makers said that in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to trim purchases by $10 billion at each meeting.
“It all just points to the Fed tapering in March absent some proof that the economy has weakened substantially,” said Drew Matus, an economist at UBS Securities LLC in New York. “Nothing in the minutes suggests that they are not going to.”