Fed search for policy thresholds hindered by volatility

Participation Rate

And the percentage of the population that is in the labor force, known as the participation rate, remains near a 30-year low of 63.6 percent. The ratio was at a post-recession low of 63.5 percent in August.

“Any sort of a threshold that is simple enough to be understood by the public is probably too simple to be good policy,” Bank of America’s Hanson said.

In its Sept. 13 statement, the FOMC said it would maintain accommodative policy for “a considerable time after the economic recovery strengthens” yet included no specific thresholds.

“We want to see the unemployment rate come down, but that’s not the only indicator, obviously, of labor market conditions,” Fed Chairman Ben S. Bernanke said in a press conference following the statement’s release. “So we, at least to this point, have decided to define it qualitatively.”

Some Fed officials have raised concerns that policy thresholds would limit the Fed’s flexibility.

“This threshold thing is going to put the committee in more of a box,” St. Louis Fed President James Bullard told reporters after a speech in Memphis, Tennessee, on Oct. 4.

Public Expectations

Since pushing rates almost to zero, the Fed has increasingly relied on shaping public expectations for interest rates as one of its monetary-policy tools.

In March 2009, the central bank began saying it would keep rates low “for an extended period.” Seeking to lower longer- term borrowing costs further, policy makers tied their commitment to a date -- mid-2013 -- for the first time in August 2011. They extended that time frame to late 2014 in January and to mid-2015 last month.

Robert Eisenbeis, chief monetary economist at Sarasota, Florida-based Cumberland Advisors, says the Fed is “asking for trouble” by relying so heavily on its communications strategy.

“If you put together the substantial evidence that the Fed can’t control the real rate of unemployment or real growth in the economy, then pinning your policy on something you can’t control or influence doesn’t make a lot of sense,” said Eisenbeis, a former research director at the Atlanta Fed.

Bloomberg News

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