Jan. 10 (Bloomberg) — The surprising drop in unemployment to the lowest level in more than five years gives Federal Reserve Chairman Ben S. Bernanke little to cheer about.
Employers in December expanded payrolls at the slowest pace in three years, and workers leaving the labor force accounted for much of the plunge in the jobless rate to 6.7% from 7%.
The data highlight a flaw in policy makers’ strategy of setting 6.5% unemployment as a threshold for considering whether to raise interest rates, said Stephen Stanley, the chief economist at Pierpont Securities in Stamford, Conn.
“Even they would admit in retrospect that was not the right thing to do,” said, Stanley, a former economist at the Richmond Fed. “The unemployment rate has gone down much faster than anyone imagined, but it’s been almost exclusively because of shrinking labor-force participation, which is not a good thing.”
The Fed tied its target interest rate to economic indicators in December 2012 with a statement that the rate would remain near zero at least as long as unemployment exceeded 6.5% and the outlook for inflation didn’t rise beyond 2.5%.
At their Dec. 17-18 meeting, Fed officials considered lowering the unemployment threshold to 6%, according to minutes of the gathering released this week. Instead, the Federal Open Market Committee decided to emphasize that rates would remain low even after the jobless rate declined to 6.5%.
In its post-meeting statement, the committee said it “likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%.”
Policy makers “generally” saw “the benefit of avoiding tying the committee’s decision too closely to the unemployment rate alone,” the minutes said.
Officials “will continue to further distance themselves from the whole thresholds framework,” Stanley said.
December’s 6.7% jobless rate is the lowest since October 2008. Economists in a Bloomberg Survey before today’s report forecast the rate would stay at 7%.
The decline came as workers quit the labor force, falling off the rolls of people who are counted as either employed or unemployed. The share of Americans in the labor force declined to 62.8%, matching the lowest level since March 1978.