Fed recalibrating as unemployment rate nears threshold

Federal Reserve policy makers plan to soon change their guidance for the path of interest rates as unemployment declines toward a threshold for considering an increase in borrowing costs, minutes of their January meeting showed.

“Participants agreed that, with the unemployment rate approaching 6.5 percent, it would soon be appropriate for the Committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed,” according to the record of the meeting, the final one led by Ben S. Bernanke before the end of his term as central bank chairman.

“Several” Fed policy makers also said that in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace” of the Fed’s bond purchases $10 billion at each meeting.

Central bankers are seeking to provide clarity on their plans for continuing to support the economy, both with low interest rates and dwindling bond purchases, after unemployment dropped last month to 6.6 percent, the lowest in more than five years.

“It seems pretty safe to say that they are close to doing away formally with the 6.5 percent threshold, and given their concerns about inflation, rate hikes are unlikely any time soon,” said Dan Greenhaus, chief strategist for BTIG LLC in New York.

Stocks, Treasuries

Stocks remained lower after the report, with the Standard & Poor’s 500 Index declining 0.3 percent to 1,836.20 at 3 p.m. in New York. The yield on the 10-year Treasury note rose three basis points, or 0.03 percentage point, to 2.74 percent.

The minutes of the Federal Open Market Committee meeting show Fed officials divided on how to clarify their guidance.

“Some participants favored quantitative guidance along the lines of the existing thresholds, while others preferred a qualitative approach that would provide additional information regarding the factors that would guide the Committee’s policy decision,” the minutes said.

Several participants said that risks to financial stability should be included in their statement, and others argued the guidance should “give greater emphasis” to keeping rates low if inflation remains “persistently” below 2 percent.

While the minutes showed a unanimous vote on the committee’s policy statement, policy makers disagree on the timing of the first interest-rate increase.

Fed Funds

“A few” officials “raised the possibility that it might be appropriate to increase the federal funds rate relatively soon,” according to the minutes.

In its previous round of forecasts in December, two policy makers favored raising interest rates in 2014. Philadelphia Fed President Charles Plosser told reporters last week in Newark, Delaware that he’s “worried” the Fed may wait too long to increase rates.

The committee showed more consensus over how to proceed with reducing bond purchases. Since succeeding Bernanke on Feb. 3, Janet Yellen has pledged to maintain his plan for “measured” cuts in purchases, even amid weaker-than-forecast payroll growth and signs harsh winter weather has slowed retailing, manufacturing and home construction.

“It all just points to the Fed tapering in March absent some proof that the economy has weakened substantially,” said Drew Matus, an economist at UBS Securities LLC in New York. “Nothing in the minutes suggests that they are not going to.”

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