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Financial Times - Fed debate on scrapping 6.5% jobless threshold
Wednesday, 09 April 2014
Federal Reserve officials held an unusual videoconference last month to debate scrapping the 6.5 per cent unemployment rate threshold for the first interest rate rises, paving the way for the big shift in forward guidance that took place in March.
Minutes of the Fed’s last monetary policy meeting, released on Wednesday, laid bare an intense discussion about forward guidance among officials in recent weeks after Janet Yellen took over as chairwoman.
They also showed some officials “expressing concern” that their projections on interest rates may be “misconstrued” as signalling a more hawkish stance, or a “less accommodative reaction function”, than was the case a few months ago.
In the event, their forecasts for the first interest rate rise – coupled with a dovish statement and comments during a press conference by Ms Yellen suggesting that such a move could happen as early as April 2015 – did cause confusion in the markets, as some officials had feared.
Such worries have eased since then, and abated further after the minutes showed how consciously Fed officials wanted to avoid the perception that they were gearing up for early rate rises.
US equity markets extended their gains after the minutes were released on Wednesday, and the dollar eased back as any lingering concerns about rate rises receded.
“The minutes convey a unified Fed that is patient for further guidance from the spring data. It seems that the markets jumped the gun on Yellen’s comments”, said Ken Wills, currency strategist at USForex.
The big debate at the Fed, however, was on forward guidance. On March 18-19, “almost all” members of the Federal Open Market Committee agreed that the numerical 6.5 per cent threshold beyond which the central bank might raise rates should be replaced with new qualitative language detailing the economic circumstances that would warrant higher rates.
But to consider all the ramifications of the decision, the Fed had convened a rare videoconference on March 4, though the minutes stated that “the agenda did not contemplate any policy decisions, and none were taken”.
During the video conference – whose existence was not made public until Wednesday’s minutes – Fed officials appeared to lay the ground for the new consensus on forward guidance that emerged two weeks later on March 19.
According to the minutes, participants agreed that the 6.5 per cent threshold was becoming “outdated” with joblessness hovering close to that level at 6.7 per cent.
“Most participants felt that quantitative thresholds, triggers or floors should not be a part of future statement language, with a number of participants noting the uncertainty associated with defining and measuring the unemployment rate,” the minutes said.
The Fed has been caught off guard by the rapid decrease in the unemployment rate over the past year on the back of declining labour force participation.
Beyond this general agreement to shift towards qualitative guidance on unemployment, however, Fed officials tossed around a string of other ideas on ways the central bank’s communication could change.
One suggested linking the first interest rate rises to complete labour market recovery, suggested tying it to real output growth. Some, however, suggested sticking with the numerical guidance, by either lowering the unemployment target or “stating explicitly” that low rates would be maintained to prevent inflation from running persistently below the Fed’s 2 per cent objective.
In another important departure, the Fed also said it would keep rates below their long-run expected level of 4 per cent for some time, even after the economy gets back to normal.
During the videoconference, most Fed officials favoured providing information on how interest rates might rise after the first increase. But some cautioned that point in time was too far in the future that it was not necessary to do so yet.
From: http://www.ft.com/intl/cms/s/0/6ddf9572-c00f-11e3-9513-00144feabdc0.html#axzz2yQrwFuZ6
