Fed May Do Away with Threshold Guidance Under New Chief

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Fed May Do Away with Threshold Guidance Under New ChiefThe first Federal Open Market Committee meeting to be presided by new Federal Reserve Chairwoman Janet L. Yellen will focus on how to reword its present low rate promise with enough gravitas so as not to upset financial markets in the process.

It is expected that the Fed will come up with a decision next week whether to remove its existing benchmark of a 6.5 percent U.S. jobless rate as the threshold upon which it should raise interest rates, and change the wording of its promise that does not rely on statistics as a guide for when the ultra-easy money policy may be shifted. This threshold has been a hallmark feature of the Fed’s forward guidance since the end of calendar 2012, when the pledge was made in order to highlight the importance of its economic stimulus initiative.

However, the U.S. unemployment rate has been teetering ever so close to the 6.5 percent threshold as of late, and even as it increased to 6.7 percent last month, jobless statistics have been trending downwards since the start of stimulus. Be that as it may, Fed policymakers are being monitored closely, as they prepare for a shift in guidance that may hint at higher rates going forward.

“This is probably a reasonable time to revamp the statement to take out that 6.5 percent threshold because it’s not really providing any great value,” said New York Federal Reserve President William C. Dudley in an interview last week. “I’d rather do it before we reach the threshold rather than after.” Despite the eagerness of Dudley and other high-ranking central bank officials, experts believe that it would behoove Yellen to change the promise’s wording in such a way that it does not change local and international market expectations, as these markets are not expecting a rise in interest rates until the middle part of calendar 2015.

For its part, the Fed had previously asserted that it will not consider increasing interest rates even if the unemployment rate falls below the threshold, contingent on inflation remaining at healthy levels.

Given the softness of recent economic statistics, most Fed officials have pinned the blame on extraordinarily poor weather conditions in the winter months, and are henceforth planning to continue tapering stimulus by another $10 billion per month, reducing the central bank’s bond purchases to $55 billion per month. This would leave the rewording of the low rate promise and a possible change in forward guidance as the main talking points of the next FOMC meeting, which takes place on March 18 and 19. The Fed will issue a policy statement at 2 p.m. EDT on the 19th, and Yellen will hold her first press conference as U.S. central bank Chairwoman 30 minutes thereafter.

Aside from Yellen’s news conference and the Fed’s official statement, the central bank will also update its forecasts for economic growth, and other key financial statistics such as unemployment and inflation. In the light of that, the Fed will also be adjusting its forecasts for when it would raise interest rates from their near-zero level.