If I’m a doctor trying to take your temperature and it becomes clear to me that the thermometer isn’t working quite right, I’d better stop depending on that thermometer, right?
To quote Yenta, “Of course right!”
That’s what the Fed’s Open Market Committee announced today, vis-à-vis a 6.5% unemployment rate as a guide post for raising the fed funds rates (the also shaved another $10 billion off of their asset buys, as expected). Thanks to the WSJ, you can compare the statement the FOMC release today to that of their last meeting, in track mode (the stuff that’s crossed out was in the last statement; the underlined stuff is new).
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy
willremain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is project ed to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to bew ell anchored. In determining how long to maintain a highly accommodative stan ce of monetary policy, the Committee will also consider otherinformation, including additionalmeasures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal . When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
As you can see, while they were of course also looking at “additional measures of labor market conditions,” the unemployment rate was a prime indicator. The problem is that it’s awfully close to their benchmark of 6.5% (it was 6.7% in February) yet both inflation and inflationary expectations remain well below their price benchmark of 2%. Also, as I’ve stressed many times on these pages, the unemployment rate remains biased down due to labor force exits, many of which have been driven by weak demand. So broader guidance, as in the revised statement, seems warranted.
As the FOMC put it:
With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions as set forth in its recent statements.
Markets didn’t like any of this one bit—looser guidance, i.e., guidance not tied to one measure, is more ambiguous and harder to track, I guess. Nor were they pleased to see committee members coalescing around 2015 for when they’ll start lifting the federal funds rate off the floor (both S&P and the Dow down 0.8% right now).
But nothing too surprising here, including the market reaction, as traders continue to experience pretty severe skittishness. Though Congress is doing less harm in terms of fiscal drag, the Fed knows they’re the only game in town targeting ongoing employment and output gaps. Meeting their dual mandate means they must target those gaps while watching prices. It doesn’t mean they have to slavishly stick with an unreliable thermometer.