Fed Removes Language on Threshold Unemployment Rate

WASHINGTON (AP) -- The Federal Reserve is seeking to clarify when it might start to raise short-term interest rates from record lows.

The Fed today also said it will cut its monthly long-term bond purchases by another $10 billion, to $55 billion, because it thinks the economy is strong enough to support further improvements in the job market.

The Fed on Wednesday reaffirmed its plan to keep short-term rates low to help support the economy. But it no longer mentions a specific unemployment rate that might lead it eventually to raise short-term rates. The Fed says instead it will monitor "a wide range of information" on the job market, inflation and the economy before approving any rate increase.

It announced the policies in a statement after its first meeting with Janet Yellen as chair.

One reason for dropping a threshold unemployment rate, as Yellen among others have noted, is that the rate can overstate the job market's health. In recent months, for example, the unemployment rate has fallen not so much because of robust hiring but because many people without a job have stopped looking for one. Once people stop looking for a job, they're no longer counted as unemployed, and the rate can fall as a result.

The Fed's previous statement had said it planned to keep short-term rates at record lows "well past" the time the unemployment rate fell below 6.5%. The rate is now 6.7%. Several Fed officials had recently suggested scrapping the 6.5% threshold and instead describing more general changes in the job market and inflation that might trigger a rate increase.

Investors have been speculating about when the Fed might raise its short-term rate, which would elevate borrowing costs and could hurt stock prices. On Wall Street, stocks fell modestly in the first few minutes after the Fed's statement was released.

More than five years ago, the Fed cut its benchmark short-term rate to a record low near zero, where it's remained since. Most analysts think the Fed will keep its target for short-term rates near zero until mid to late 2015.

The Fed also updated its economic forecasts Wednesday. Fed officials expect the U.S. economy to grow at a steady if modest pace in 2014 despite weather-related setbacks this winter.

The Fed is forecasting growth of 2.8% to 3% this year, a bit lower than its December projection of between 2.8% and 3.2%.

The forecast suggests that Fed policymakers will continue to pare their monthly bond purchases, which are intended to stimulate growth by keeping interest rates low. It is doing so despite challenges the U.S. economy and financial markets face, from a brutal winter that's depressed growth, to fears about how Russia's aggression toward Ukraine might slow the global economy.

link


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2882049, ~/Articles/ArticleHandler.aspx, 10/22/2014 5:58:44 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement