Fed Spotted Swapping Unemployment Threshold for Qualitative Guidance
March 18, 2014 8:19 am
The Federal Reserve will possibly dismiss its 6.5 percent jobless rate threshold and change to qualitative guidance for signaling when it will consider boosting the main interest rate, according to economists in a survey.
The Federal Open Market Committee will declare on March 19 that it will connect policy to a scope of economic indicators, according to 76 percent of 54 economists in a March 14-17 Bloomberg News survey. Twenty percent of the economists surveyed stated that the Fed will continue the threshold it adopted in December 2012, while 6 percent stated that it will bring down such guidance entirely.
The FOMC will possibly succeed in updating guidance without triggering investors to assume an earlier hike in the primary interest rate, said Michael Feroli, chief U.S. economist at New York-based JPMorgan Chase & Co. and an ex researcher for the Fed Board in Washington. In December, 12 out of 17 FOMC participants projected the first rate hike in 2015.
“It’s a change in how they deliver the message rather than a change in the message itself,” Feroli said. “The market’s expecting it, and if they deliver broadly what people are looking for,” bond yields “should stay pretty much where they are.”
Federal Reserve Chair Janet Yellen and her colleagues, who have clinched the main rate near zero since December 2008, are acknowledging ways to clarify when they’ll boost borrowing costs for the first time since 2006 after payrolls rallied more than estimated last month and jobless sagged down to 6.7 percent from 7 percent in November. They plan to start a two-day assembly tomorrow.
‘Less Specificity’
Policy makers in their new guidance will lean toward “less specificity and a greater emphasis on just judgment,” said John Silvia, chief economist at Wells Fargo & Co. in Charlotte, North Carolina.
“Often these economic numbers can move in ways you don’t anticipate and because of things you can’t anticipate, and I think they got caught off guard,” he said, citing the decline in joblessness.
Policy makers at their December 17-18 assembly projection unemployment would decrease by the end of this year to 6.3 percent to 6.6 percent. The rate has sag down from 7.5 percent in June and a 26-year high of 10 percent in October 2009.
The FOMC this week will also declare a trim in monthly bond purchases by $10 billion, to $55 billion, and continue cut downs at that pace at every meeting before declaring an end to the purchasing at its October 28-29 gathering, according to the median of responses in the survey. Policy makers at each of their prior two meetings trim down monthly purchases by $10 billion.
‘Measured Steps’
The committee “will likely reduce the pace of asset purchases in further measured steps at future meetings,” Yellen stated to the Senate Banking Committee on February 27. “That said, purchases are not on a preset course, and the committee’s decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”
She said she supports the idea of many Fed officials that the FOMC should consider a range of indicators in setting policy now that unemployment is closing in on the threshold. The rate moving in almost 6.5 percent “moves in the direction of qualitative guidance,” she said.
Yellen is working to refine Fed communications a year after she said the jobless rate is limited in how much it reveals about the labor market. The unemployment rate has fallen as labor force participation, the portion of the working-age population either working or looking for a job, held at 63 percent in February, close to the weakest mark since 1978.
Work Applicants
“A decline in the unemployment rate could, for example, primarily reflect the exit from the labor force of discouraged job seekers,” Yellen said in a March 2013 speech in Washington. “That is an important reason why the committee will consider a broad range of labor market indicators.”
Yellen stated that while Fed research concludes unemployment is “probably the best single indicator” of labor-market conditions, she also monitors measures such as job loss and hiring, layoffs, and quit rates.
Federal Reserve Bank of New York President William C. Dudley in remarks on March 6 endorsed a switch to qualitative guidance. In a speech the next day he said the decrease in the unemployment rate “significantly overstates the degree of improvement in the labor market.” People dropping out of the labor force accounts for much of the decline in the jobless rate, said Dudley, FOMC vice chairman.
Against Wall
“Dudley seemed pretty clear it’s time to abandon the 6.5 percent unemployment rate, and it makes sense to do it before their backs are up to the wall,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “They’ve laid down enough clues to tell me that they’re ready to make the change.”
St. Louis Fed President James Bullard and San Francisco’s John Williams said last month the Fed should switch to qualitative guidance. Neither vote on policy this year.
“My preference would be, as we go through the threshold on unemployment, to just drop reference to these explicit thresholds and just go back to a more normal policy where we say we’re looking at all the data,” Bullard said to reporters on February 19.
The material has been provided by InstaForex Company – www.instaforex.com
The Federal Reserve will possibly dismiss its 6.5 percent jobless rate threshold and change to qualitative guidance for signaling when it will consider boosting the main interest rate, according to economists in a survey.
The Federal Open Market Committee will declare on March 19 that it will connect policy to a scope of economic indicators, according to 76 percent of 54 economists in a March 14-17 Bloomberg News survey. Twenty percent of the economists surveyed stated that the Fed will continue the threshold it adopted in December 2012, while 6 percent stated that it will bring down such guidance entirely.
The FOMC will possibly succeed in updating guidance without triggering investors to assume an earlier hike in the primary interest rate, said Michael Feroli, chief U.S. economist at New York-based JPMorgan Chase & Co. and an ex researcher for the Fed Board in Washington. In December, 12 out of 17 FOMC participants projected the first rate hike in 2015.
“It’s a change in how they deliver the message rather than a change in the message itself,” Feroli said. “The market’s expecting it, and if they deliver broadly what people are looking for,” bond yields “should stay pretty much where they are.”
Federal Reserve Chair Janet Yellen and her colleagues, who have clinched the main rate near zero since December 2008, are acknowledging ways to clarify when they’ll boost borrowing costs for the first time since 2006 after payrolls rallied more than estimated last month and jobless sagged down to 6.7 percent from 7 percent in November. They plan to start a two-day assembly tomorrow.
‘Less Specificity’
Policy makers in their new guidance will lean toward “less specificity and a greater emphasis on just judgment,” said John Silvia, chief economist at Wells Fargo & Co. in Charlotte, North Carolina.
“Often these economic numbers can move in ways you don’t anticipate and because of things you can’t anticipate, and I think they got caught off guard,” he said, citing the decline in joblessness.
Policy makers at their December 17-18 assembly projection unemployment would decrease by the end of this year to 6.3 percent to 6.6 percent. The rate has sag down from 7.5 percent in June and a 26-year high of 10 percent in October 2009.
The FOMC this week will also declare a trim in monthly bond purchases by $10 billion, to $55 billion, and continue cut downs at that pace at every meeting before declaring an end to the purchasing at its October 28-29 gathering, according to the median of responses in the survey. Policy makers at each of their prior two meetings trim down monthly purchases by $10 billion.
‘Measured Steps’
The committee “will likely reduce the pace of asset purchases in further measured steps at future meetings,” Yellen stated to the Senate Banking Committee on February 27. “That said, purchases are not on a preset course, and the committee’s decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”
She said she supports the idea of many Fed officials that the FOMC should consider a range of indicators in setting policy now that unemployment is closing in on the threshold. The rate moving in almost 6.5 percent “moves in the direction of qualitative guidance,” she said.
Yellen is working to refine Fed communications a year after she said the jobless rate is limited in how much it reveals about the labor market. The unemployment rate has fallen as labor force participation, the portion of the working-age population either working or looking for a job, held at 63 percent in February, close to the weakest mark since 1978.
Work Applicants
“A decline in the unemployment rate could, for example, primarily reflect the exit from the labor force of discouraged job seekers,” Yellen said in a March 2013 speech in Washington. “That is an important reason why the committee will consider a broad range of labor market indicators.”
Yellen stated that while Fed research concludes unemployment is “probably the best single indicator” of labor-market conditions, she also monitors measures such as job loss and hiring, layoffs, and quit rates.
Federal Reserve Bank of New York President William C. Dudley in remarks on March 6 endorsed a switch to qualitative guidance. In a speech the next day he said the decrease in the unemployment rate “significantly overstates the degree of improvement in the labor market.” People dropping out of the labor force accounts for much of the decline in the jobless rate, said Dudley, FOMC vice chairman.
Against Wall
“Dudley seemed pretty clear it’s time to abandon the 6.5 percent unemployment rate, and it makes sense to do it before their backs are up to the wall,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “They’ve laid down enough clues to tell me that they’re ready to make the change.”
St. Louis Fed President James Bullard and San Francisco’s John Williams said last month the Fed should switch to qualitative guidance. Neither vote on policy this year.
“My preference would be, as we go through the threshold on unemployment, to just drop reference to these explicit thresholds and just go back to a more normal policy where we say we’re looking at all the data,” Bullard said to reporters on February 19.
The material has been provided by InstaForex Company – www.instaforex.com
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