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March 19, 2014 at 11:24 AM
The Federal Reserve gave itself room to keep borrowing costs low at least until next year by dropping a linkage between the benchmark interest rate and a specific level of unemployment.
“A highly accommodative stance of monetary policy remains appropriate,” the Federal Open Market Committee said in a statement on Wednesday following a meeting in Washington that was the first led by Chair Janet Yellen. In determining how long to keep rates low, the committee will assess progress towards its goals of maximum employment and 2 percent inflation, it said.
That assessment takes into account a “wide range of information,” including labor market conditions, inflation expectations and financial markets. The Fed also reduced the monthly pace of bond purchases by $10 billion, to $55 billion.
The Fed is overhauling forward guidance after unemployment declined toward 6.5 percent, its previous threshold for a rate increase, faster than policy makers predicted. Yellen last month told lawmakers that the unemployment rate alone isn’t an adequate gauge of economic health and “there’s a great deal of slack in the labor markets still that we need to work to eliminate.”
Stocks and Treasuries declined as the Fed’s new forecasts showed more officials predicting the benchmark rate, now close to zero, would rise at least to 1 percent at the end of 2015 and 2.25 percent by the end of the following year.
Yellen News Conference
Yellen, in a news conference, played down the importance of the forecasts, saying they are not as important as the FOMC statement.
“These dots are going to move up and down over time,” she said in a reference to the forecasts, which are illustrated as dots on a chart. They moved up “ever so slightly,” she added. “The committee’s views on policy will likely evolve.”
The FOMC repeated that it will reduce asset purchases “in further measured steps at future meetings.” At the same time, “asset purchases are not on a preset course.” The committee announced $10 billion reductions in purchases at the previous two meetings.
“Growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions,” the Fed said. Even so, “there is sufficient underlying strength in the broader economy to support ongoing improvement in labor-market conditions.”
Consumer Prices
The central bank’s preferred gauge of consumer prices climbed 1.2 percent in the year through January and hasn’t exceeded its 2 percent goal since March 2012. That gives policy makers “ample scope to continue to try to promote a return to full employment,” Yellen testified to lawmakers Feb. 27.
Minneapolis Fed President Narayana Kocherlakota dissented, saying the statement “weakens the credibility of the committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.”
Seventy-six percent of economists in a Bloomberg survey March 14-17 predicted the Fed would drop its unemployment threshold. Economists also predicted a $10 billion reduction in the monthly pace of bond purchases, according to the median of responses.
Yellen, 67, took over as Fed chair last month after three years as deputy to Ben S. Bernanke. In that role, she helped shape the communications policies the Fed wielded as it sought to nurture a recovery from the worst recession since the Great Depression.
Zero Rates
