6.5 Percent Unemployment No Longer a Good Target for Rate Rise, Says Fed

The Federal Reserve is thinking about changing a major policy benchmark.

A protesters hands out flyers at a 'Rise Up for the Unemployed' demonstration on Wall Street across from the New York Stock Exchange on February 7, 2014 in New York City.
National Journal
Catherine Hollander
Feb. 19, 2014, 11:50 a.m.

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.

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