MercoPress. South Atlantic News Agency

“Soft” dollar until US unemployment rate falls below 6.5% says Fed

Bernanke said rates will remain exceptionally low “until at least through mid-2015”

The US Federal Reserve has said it plans to keep interest rates at close to zero at least until the US unemployment rate falls below 6.5%. The Fed previously had a date-driven target, rather than a data-driven one.

The Fed also said it will continue to buy 85bn dollars a month of government bonds and mortgage-backed securities to try to boost the economy. But changes in the way it does this will mean more money is pumped into the economy.

“The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions” the Fed said in a statement following a two-day meeting.

Interest rates in the US have been close to zero for several years now, and the Fed again kept them at below 0.25%. But in a surprise move, the Fed adopted numerical thresholds for future interest rate policy, something which had not been expected until next year. It said that it expects to keep rates at this exceptionally low range as long as:

• the unemployment rate remains above 6.5%
• inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2% longer-run goal
• longer term inflation expectations continue to be well anchored

The Fed had previously said it expected to maintain rates at their current level until 2015.

But in a news conference, Fed chairman Ben Bernanke said the modified formulation did not mean any change in the committee's expectations. It still anticipates holding rates at the exceptionally low range “at least through mid-2015”.

Moreover, the stated threshold of 6.5% should not be interpreted as the committee's longer run target for unemployment, which remains at 5.2-6.0%, Mr Bernanke added.

By tying future monetary policy more explicitly to economic conditions, it should make it more transparent, he said.

Under the Fed's current program “Operation Twist”, which expires at the end of the year, the central bank sells short-term bonds in order to buy 45bn a month of longer term bonds. It does not put any new money into the economy, but aims to keep long-term interest rates down and encourage individuals and businesses to borrow and spend more.

But the Fed has run out of short-term debt to sell, so in order to maintain its pace of long-term Treasury purchases and to keep long-term rates low, it must spend more to boost its portfolio.

The central bank's latest policy meeting came against the backdrop of the looming “fiscal cliff” - the tax increases and spending cuts due to be implemented in January if Congress and the White House do not strike a deal.

This may have proved a factor in its decision-making as Mr Bernanke said last month that all of the changes would “pose a substantial threat to the recovery”.

Fears of the cliff have led some companies to delay investing and hiring, while consumers have also cut back on spending. The Fed has pledged to keep on bond buying until the labour market outlook improves substantially.

Though the unemployment rate fell to a four-year low of 7.7% in November, statistics suggest that much of the decline in the jobless rate since 2008 has been due to people dropping out of the workforce, either due to retirement or because they have given up seeking work.

The central bank also revised its economic outlook. It now expects the economy to grow between 1.7-1.8% this year and 2.3-3.0% next year. In September it had forecast growth of 1.7-2.0% in 2012 and 2.5-3.0% in 2013.

The Fed release follows:

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2% objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of 40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of 45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labour market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.