For over a year, the Federal Reserve has said it planned to raise its benchmark interest rate — the one that’s currently near zero, and whose level ripples through interest rates across the economy — around the time that the nation’s unemployment rate hit 6.5 percent, so long as inflation wasn’t getting out of hand.
When Fed officials made that pledge in December 2012, unemployment was 7.9 percent. Now, as the jobless rate inches closer to the 6.5 percent threshold, the Fed is rethinking its stance, minutes from the central bank’s latest policy-setting meeting revealed Wednesday.
“Participants agreed that, with the unemployment rate approaching 6-1/2 percent, it would soon be appropriate for the Committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed,” said the minutes from the late-January meeting, released after the customary three-week lag. Last month, the Bureau of Labor Statistics said the jobless rate was 6.6 percent.
Fed officials don’t know what their new guidance will look like yet. Some of the Fed’s 10 voting policy-committee members thought it should be changed quantitatively; others thought a more flexible qualitative approach should be adopted. Several thought financial stability should join the unemployment and inflation measures that are intended to help the Fed convey to markets and Americans when they can expect rates to rise.
The Fed’s talk of changing its guidance dovetails with two broader economic discussions taking place. Although it has been falling, the U.S. unemployment rate is no longer seen as a great window into the health of the labor market. Part of its rapid decline, from 7.2 percent in October to 6.6 percent in January, was due to people dropping out of the labor force. Some were doing so for the “right” reasons — i.e., baby boomers retiring — and others for the “wrong” reasons — i.e., those becoming discouraged with the labor-force situation and dropping out. It’s tough to use the shorthand of the headline rate to convey that distinction. The persistent problems of long-term unemployment and underemployment are also not captured by the BLS’s primary jobless rate.
Fed policymakers grappled with another key question in late January: how much the downward trend in labor-force participation is due to structural factors, like demographics, and how much is due to cyclical factors, like the weak recovery. “The extent of the cyclical portion of the decline was viewed by some as difficult to gauge at present,” the minutes said.
The January meeting was Ben Bernanke’s last as Fed chair; when the Fed policymakers next convene, on March 18-19, Janet Yellen will be leading the board.