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
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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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