US Fed ties interest rate to unemployment for first time

12 December 2012 19:01  [Source: ICIS news]

WASHINGTON (ICIS)--The US Federal Reserve said on Wednesday that it will keep its key federal funds interest rate at or near zero until the nation’s unemployment rate drops below 6.5%.

In an unprecedented move, the Fed – the US central bank – for the first time tied its monetary policy to a specific unemployment target.

The US jobless rate is 7.7%.

Previously, the Fed’s rate-setting federal open market committee (FOMC) had said that the historically low 0%-0.25% federal funds rate would likely be maintained for a specific period of time.

Most recently, the Fed said that it would probably keep the interest rate at that level until mid-2015 at the least. The 0%-0.25% rate was first set in December 2008 when the US was in the midst of the recession.

By now tying the federal funds rate to the pace of unemployment, the Fed is essentially making a more definitive commitment. Its previously time-delimited rate forecast was not a guarantee, because the central bank governors had always stated that they “expected” to keep the rate that low until mid-2015.

However, the rate keyed to the level of unemployment also is not inviolable. The Fed said that it would hold to that promise so long as the nation’s inflation rate does not exceed 2.5%.

The US inflation rate has been running below 2%, and the Fed noted that the nation’s long-term inflation expectations remain low.

The central bank governors also announced that they would continue into next year their practice of buying long-term US Treasury bonds and take other measures to keep longer-term interest rates low as well.

“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” the committee statement said.

Noting that the US economy’s recovery is still only moderate at best, the Fed said it remains concerned that the pace of growth is not sufficient to make serious headway against the still-high US unemployment rate of 7.7%.

“If the outlook for the labour market does not improve substantially,” the central bank said, “the committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.”

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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