|
 Fed policymakers will probably decide next week to scrap their
threshold of a 6.5 percent unemployment rate for considering a rate
rise, and instead embrace new language that is less specific about
when tighter policy might come.
The threshold has been a staple of the central bank's so-called
forward guidance since December 2012, when it was first adopted to
underscore a commitment to stimulus until the U.S. economy was on
surer footing.
But the U.S. unemployment rate has come down with surprising speed,
and now stands at 6.7 percent, leaving Fed officials anxious to
adopt guidance more in keeping with their view that the economy
won't be ready for higher rates for some time to come. The trick for
Yellen will be re-crafting the statement without changing
expectations in markets, which currently don't see a rate rise until
midway through next year.
"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," William Dudley, the influential president of the New
York Fed, said last week. "I'd rather do it before we reach the
threshold rather than after."
Fed officials have chalked up recent signs of economic weakness to
unusually severe winter weather, and they appear intent to move
ahead with another $10 billion reduction in their monthly
bond-buying stimulus, taking it down to $55 billion.
That leaves a revamping of the forward guidance on rates as the
focal point for debate when officials gather on March 18-19.
They will issue a policy statement at 2 p.m. EDT on March 19. A half
hour later, Yellen, the Fed's former vice chair, will conduct her
first news conference as head of the world's most influential
central bank.
The Fed will also release updated forecasts from its 17 policymakers
for economic growth, inflation and unemployment. Most importantly,
officials will revise their predictions for when they will finally
begin to raise rates after more than five years of holding them
close to zero.
EVANS RULE
As it stands, the Fed has said it would not consider a rate rise
until well after the unemployment rate drops below 6.5 percent, as
long as inflation remains contained.
It is unclear exactly what will replace this guidance, which is the
brainchild of Chicago Fed President Charles Evans, a stalwart Yellen
ally who himself has acknowledged the thresholds have outlived their
usefulness.
"We have had discussions on the way to formulate the next vintage of
this guidance for some time," Evans said on Monday. "I can't predict
to you when we will pull the trigger."
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What is clear is that the Fed will look well beyond the jobless rate
in gauging the health of the labor market and deciding when to raise
rates.
Yellen has emphasized the need to examine "a broad range of
indicators," including the number of part-time workers who want
full-time work and the percentage of long-term unemployed.
"The unemployment rate is not a sufficient statistic for the state
of the labor market," she told lawmakers last month.
But a clear message can be complicated to convey.
The Atlanta Fed publishes a "spider chart" plotting a range of data
that, to the initiated, shows an overall improvement in labor
conditions (http://www.frbatlanta.org/chcs/labormarket/?d=1&s=tw)
and the New York Fed this week released its own "eight faces" of the
job market graphic to track a number of key indicators (http://www.newyorkfed.org/labor-conditions/).
"The art in this is conveying information that helps people plan and
financial markets align their expectations with ours," Dennis
Lockhart, head of the Atlanta Fed, told Reuters last week.
Labor market gauges are not the only things the Fed will be watching
in making a judgment on when to raise rates.
As the jobless rate declined close to the Fed's threshold, the
central bank began to emphasize the low level of inflation, which is
running well under its 2 percent target. It could redouble that
emphasis as a way to underscore its commitment to keeping rates low
for some time to come.
Under Yellen's predecessor Ben Bernanke, the Fed's post-meeting
statement swelled in verbiage as the central bank packed
increasingly more information into its written communications.
Given the difficulty of laying out clear guidance, that trend may be
headed for a reversal under Yellen.
(Reporting by Ann Saphir and Jonathan
Spicer; editing by Tim Ahmann and Chizu Nomiyama)
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