Fed weighs change to rate guidance

Washington — Federal Reserve officials are considering whether to alter their guidance on the likely path of interest rates to give them more flexibility to react to changes in the economy.
The Fed has said since March that its benchmark rate would stay low for a “considerable time” after it completes monthly bond buying intended to boost growth. With purchases set to end late this year and the Fed nearing its full-employment goal, that assurance will soon become obsolete.

The need for new guidance unites policy makers who want to keep rates low for longer, like Boston Fed President Eric Rosengren, with those who prefer to raise them sooner, such as Philadelphia’s Charles Plosser.

Both want to move away from promising to keep rates low for some unspecified period of time toward tying the first increase to changes in inflation and the job market.

One stumbling block is how to change the language without sparking an unwanted jump in bond yields that could threaten to stifle the expansion.
“That’s going to be hotly debated,” said Michael Feroli, chief US economist at JPMorgan Chase & Co. in New York and a former Fed Board researcher.

“If they can find a way to replace that with something that will mollify the market’s reaction, you will see a change.”
Tightening isn’t imminent. In June, policy makers forecast that the benchmark federal funds rate would rise some time next year. They will issue new forecasts for the rate, along with economic growth, unemployment and inflation, at the conclusion of a September 16-17 meeting of the Federal Open Market Committee.

Policy makers say they want to move away from any form of guidance based on time periods and dates, and instead stress that the outlook for the federal funds rate depends on progress toward the Fed’s twin goals of full employment and low and stable inflation.

“As we approach levels of unemployment that many consider ‘full employment’, the Fed should no longer issue guidance on the approximate timing of any monetary policy changes,” Rosengren, who has backed unprecedented stimulus and doesn’t have a vote on policy this year, said in a September 5 speech in Boston.

Rosengren said the Fed should be “patient” in conducting policy “in the interest of ensuring that the economy reaches full employment and the 2 percent inflation target as quickly as possible.”

Unemployment fell to 6,1 percent last month from 10 percent in October 2009. The decline has been faster than Fed officials expected at the end of last year, when they forecast that the jobless rate would fall to 6,3 percent to 6,6 percent by the end of 2014. — Bloomberg.