Federal Reserve (Fed) staff research papers to be presented at the International Monetary Fund (IMF) annual research conference on Thursday and Friday suggest that the US monetary authority might have solid reasons to lower the unemployment threshold and allow inflation to move beyond its current target.
According to the report, one of the papers came to the conclusion that the Fed should consider lowering its call to guarantee maintaining interest rates at historically low levels as long as the unemployment rate remains above 6.5%. The study's economic model shows that "reducing the unemployment threshold improves measured economic performance until the unemployment threshold reaches 5.5%".
The other paper warned of the danger of "hysteresis", the possibility that periods of high joblessness in an economy increase the rate of unemployment below which inflation begins to accelerate. According to the agency, the study suggests that the Fed should drive economic growth even if this pushes inflation over its 2% target "for a certain period of time".
Due to these two papers,Goldman Sachs Chief Economist Jan Hatzius, arrived at the conclusion that the Fed will cut its unemployment threshold to 6% at the March 2014 meeting at the same time it begins to taper its asset purchase program. The idea is that the dovish threshold cut will counterbalance the "hawkish" QE reduction. Hatzius did note that both decisions could come as early as the December Fed meeting.
Source: LiveCharts
According to the report, one of the papers came to the conclusion that the Fed should consider lowering its call to guarantee maintaining interest rates at historically low levels as long as the unemployment rate remains above 6.5%. The study's economic model shows that "reducing the unemployment threshold improves measured economic performance until the unemployment threshold reaches 5.5%".
The other paper warned of the danger of "hysteresis", the possibility that periods of high joblessness in an economy increase the rate of unemployment below which inflation begins to accelerate. According to the agency, the study suggests that the Fed should drive economic growth even if this pushes inflation over its 2% target "for a certain period of time".
Due to these two papers,Goldman Sachs Chief Economist Jan Hatzius, arrived at the conclusion that the Fed will cut its unemployment threshold to 6% at the March 2014 meeting at the same time it begins to taper its asset purchase program. The idea is that the dovish threshold cut will counterbalance the "hawkish" QE reduction. Hatzius did note that both decisions could come as early as the December Fed meeting.
Source: LiveCharts
