"The rapid drop in U.S. unemployment will make re-crafting the Federal Reserve's easy-money promise a top priority for new Chair Janet Yellen, who will probably avoid tying policy to specific targets in the labor market.
It was more than a year ago that the U.S. central bank first promised not to raise interest rates until joblessness fell to at least 6.5 percent, a pledge that policymakers thought would hold until at least mid-2015.
The Fed still wants to assure investors that rates will stay low for at least another year, but there is growing debate among policymakers over how to get this message across now that the jobless rate stands at 6.6 percent but the pace of job creation remains erratic at best.
Fed officials are likely to drop any reference to a specific rate of unemployment, according to several who have addressed the topic in recent days. They could also renew a pledge not to tighten policy until inflation starts to rise back to more normal levels, and they may reinforce the notion that financial conditions will factor into any decision.
"We will have to reformulate it and provide some qualitative way of providing an assessment of what time horizon we think is most likely," Jeffrey Lacker, president of the Richmond Fed, told reporters in Virginia on Tuesday.
Lacker pointed to one option available to the Fed: relying more on charts the Fed publishes four times a year showing when each individual policymaker expects rates to finally rise, and how high they will be up to four years into the future.
The so-called summary of economic projections, or SEP, last published in December, has 12 of the Fed's 17 policymakers expecting to begin to tighten policy some time next year - an expectation that aligns with traders in rate-futures markets.
"I'd point out that the SEP provides a rich portrayal of the array of views within the committee, and even if we said nothing the SEP would be pretty informative," Lacker said.
At its March policy meeting, the Fed could simply erase an extensive reference to its rate-rise thresholds - including a nod to 6.5-percent unemployment and 2.5 percent inflation - and restate that easy policy will be needed "for a considerable time after the asset purchase program ends and the economic recovery strengthens."
Yellen, at her first press conference as chair after the meeting, could then direct investors' attention to the SEP, which also shows Fed officials' forecasts for unemployment, inflation and economic growth over the next few years.
As it stands, the central bank's policy is to keep rates near zero until "well past the time" joblessness falls to below 6.5 percent "especially" if inflation expectations remain weak.
In a surprise to some, unemployment has swiftly fallen from 7.9 percent a year ago, and from a post-recession high of 10 percent in 2009. On Friday, the Labor Department reported the jobless rate had fallen to a five-year low of 6.6 percent, but the fewer than 200,000 new jobs created over the past two months is insufficient to sustain the current pace of economic growth.
The quick drop in joblessness has soured Fed officials to the idea of simply lowering the unemployment threshold.
Instead, as Boston Fed President Eric Rosengren suggested on Thursday, they could stress that broader measures of the labor market - such as the number of part-time or discouraged workers, or the rate of wage growth - will play a bigger role as they mull a rate rise".
Source: Reuters
It was more than a year ago that the U.S. central bank first promised not to raise interest rates until joblessness fell to at least 6.5 percent, a pledge that policymakers thought would hold until at least mid-2015.
The Fed still wants to assure investors that rates will stay low for at least another year, but there is growing debate among policymakers over how to get this message across now that the jobless rate stands at 6.6 percent but the pace of job creation remains erratic at best.
Fed officials are likely to drop any reference to a specific rate of unemployment, according to several who have addressed the topic in recent days. They could also renew a pledge not to tighten policy until inflation starts to rise back to more normal levels, and they may reinforce the notion that financial conditions will factor into any decision.
"We will have to reformulate it and provide some qualitative way of providing an assessment of what time horizon we think is most likely," Jeffrey Lacker, president of the Richmond Fed, told reporters in Virginia on Tuesday.
Lacker pointed to one option available to the Fed: relying more on charts the Fed publishes four times a year showing when each individual policymaker expects rates to finally rise, and how high they will be up to four years into the future.
The so-called summary of economic projections, or SEP, last published in December, has 12 of the Fed's 17 policymakers expecting to begin to tighten policy some time next year - an expectation that aligns with traders in rate-futures markets.
"I'd point out that the SEP provides a rich portrayal of the array of views within the committee, and even if we said nothing the SEP would be pretty informative," Lacker said.
At its March policy meeting, the Fed could simply erase an extensive reference to its rate-rise thresholds - including a nod to 6.5-percent unemployment and 2.5 percent inflation - and restate that easy policy will be needed "for a considerable time after the asset purchase program ends and the economic recovery strengthens."
Yellen, at her first press conference as chair after the meeting, could then direct investors' attention to the SEP, which also shows Fed officials' forecasts for unemployment, inflation and economic growth over the next few years.
As it stands, the central bank's policy is to keep rates near zero until "well past the time" joblessness falls to below 6.5 percent "especially" if inflation expectations remain weak.
In a surprise to some, unemployment has swiftly fallen from 7.9 percent a year ago, and from a post-recession high of 10 percent in 2009. On Friday, the Labor Department reported the jobless rate had fallen to a five-year low of 6.6 percent, but the fewer than 200,000 new jobs created over the past two months is insufficient to sustain the current pace of economic growth.
The quick drop in joblessness has soured Fed officials to the idea of simply lowering the unemployment threshold.
Instead, as Boston Fed President Eric Rosengren suggested on Thursday, they could stress that broader measures of the labor market - such as the number of part-time or discouraged workers, or the rate of wage growth - will play a bigger role as they mull a rate rise".
Source: Reuters
