The Federal Reserve will probably discard its 6.5 percent jobless rate threshold while adopting qualitative guidance for signaling when it will consider raising the benchmark interest rate, economists said in a survey.
The Federal Open Market Committee tomorrow will say that it will link policy to a range of economic indicators, according to 76 percent of 54 economists in a March 14-17 Bloomberg News survey. Twenty percent of the economists surveyed said the Fed will maintain the threshold it adopted in December 2012, while 6 percent said it will drop such guidance entirely.
The FOMC will probably succeed in updating guidance without prompting investors to expect an earlier increase in the main interest rate, said Michael Feroli, chief U.S. economist at New York-based JPMorgan Chase & Co. and a former researcher for the Fed Board in Washington. In December, 12 out of 17 FOMC participants projected the first rate increase 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.”
Fed Chair Janet Yellen and her colleagues, who have held the main rate near zero since December 2008, are considering ways to clarify when they’ll increase borrowing costs for the first time since 2006 after payrolls rose more than projected last month and unemployment fell to 6.7 percent from 7 percent in November. They plan to begin a two-day meeting Tuesday.
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 fall in joblessness.
Policy makers at their Dec. 17-18 meeting forecast unemployment would decline by the end of this year to 6.3 percent to 6.6 percent. The rate has fallen from 7.5 percent in June and a 26-year high of 10 percent in October 2009.
The FOMC this week will also announce a cut in monthly bond purchases by $10 billion, to $55 billion, and continue reductions at that pace at every meeting before announcing an end to the buying at its Oct. 28-29 gathering, according to the median of responses in the survey. Policy makers at each of their prior two meetings cut monthly purchases by $10 billion.
The committee “will likely reduce the pace of asset purchases in further measured steps at future meetings,” Yellen said to the Senate Banking Committee on Feb. 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 agrees with 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 nearing 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 unemployment rate is limited in how much it reveals about the labor market. The jobless 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 lowest level since 1978.
“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 said 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 comments on March 6 endorsed a switch to qualitative guidance. In a speech the following day he said the decline in the jobless rate “significantly overstates the degree of improvement in the labor market.” People dropping out of the labor force accounts for much of the fall in the unemployment rate, said Dudley, FOMC vice chairman.
“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 votes 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 Feb. 19.
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