Fed recalibrating as unemployment rate nears threshold

Reducing Purchases

Policy makers in January reduced purchases to $65 billion a month in the second consecutive $10 billion cut. Yellen, speaking in congressional testimony on Feb. 11, said only a “notable change in the outlook” for the economy would prompt a slower pace of tapering.

The minutes show “a couple” of participants were concerned about low inflation and slack in the labor market and said the data “raised questions about the desirability of reducing the pace of purchases; these participants judged, however, that a pause in the reduction of purchases was not justified at this stage.”

Fed officials raised concerns about too-low inflation several times throughout their meeting. The personal consumption expenditures price index rose 1.1 percent last year, almost a full point below the Fed’s 2 percent goal.

Policy Goals

Some participants wanted an “explicit indication” in their annual statement on policy goals that prices persistently above or below their 2 percent inflation target would be “equally undesirable.”

“I don’t recall another set of recent minutes being as concerned about inflation from the downside,” Greenhaus said.

The language on the policy goals statement will be reviewed this year. “Several” participants argued that FOMC’s forward guidance in the statement “should give greater emphasis to the committee’s willingness to keep rates low if inflation were to remain persistently below” the 2 percent target.

The Fed met before a government report showed payrolls increased by 113,000 in January after a gain of 75,000 in December. The jobless rate unexpectedly declined to 6.6 percent in January, the lowest level in more than five years, and 0.1 percentage point above the Fed’s threshold for considering an increase in the benchmark interest rate.

Fisher, Rosengren

The plan to cut bond buying in $10 billion increments at each FOMC meeting has won support this year from policy makers ranging from Dallas Fed President Richard Fisher, an opponent of added stimulus who votes on policy this year, to Boston’s Eric Rosengren, who dissented against the December decision to start winding down bond buying. Rosengren doesn’t vote in 2014.

Bond prices slumped after Bernanke told Congress’s Joint Economic Committee on May 22 that the Fed could scale back stimulus efforts “in the next few meetings” if the employment outlook shows “sustainable” improvement. The yield on the 10- year Treasury note rose from 1.93 percent the day before Bernanke’s comment to 2.53 percent on June 21.

Interest rates also climbed after the FOMC announced the start of tapering on Dec. 18, with the yield on the 10-year Treasury note rising to 3.03 percent on Dec. 31, a more than two-year high. The yield was 2.71 percent at 1:32 p.m. in New York trading.

The FOMC said in December 2012 that it would hold the target interest rate near zero at least as long as unemployment remained above 6.5 percent, so long as forecasts for inflation do not climb above 2.5 percent. In December 2013 the committee strengthened its commitment, saying it would probably be appropriate to hold the rate near zero “well past the time” that unemployment falls below 6.5 percent.

Labor Measures

Yellen said in her congressional testimony that the unemployment rate alone isn’t an adequate labor-market measure. Policy makers, who will see another jobs report before they next meet March 18-19, “would be looking at a broad range of data on the labor market, including unemployment, job creation and many other indicators of labor market performance,” she said.

The minutes show that the FOMC debated “the reliability of the unemployment rate as an indicator of overall labor market conditions.” Several members said that “broader concepts of the unemployment rate,” which include people who have stopped looking for work but wish they had a job and part-time workers who want full-time employment, are still “well above the official unemployment rate, suggesting that considerable labor market slack remained.”

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