US Fed to keep interest rates low even if jobless pace falls

11 February 2013 21:25  [Source: ICIS news]

WASHINGTON (ICIS)--A top US central bank official said on Monday that the Federal Reserve Board may maintain its historically low interest rate even if the nation’s unemployment measure falls below 6.5%.

Janet Yellen, vice chair at the Fed, told a union meeting that even if US unemployment fell below 6.5%, that would not necessarily trigger an increase in the central bank’s key federal funds interest rate.

Her statement signalled that the Fed could continue its accommodative policies and the record-low interest rate until the nation’s unemployment rate was nearer to what the central bank considers a normal jobless range of 5.2-6%.

The current unemployment rate is 7.9%.

Yellen’s statements on Monday appeared to broaden somewhat the Fed’s unprecedented decision on 12 December to link its interest rate to the unemployment level.

In that ruling, the Fed said that it would keep interest rates at their current 0% to 0.25% until the unemployment rate fell below 6.5%, but on condition that the country’s inflation rate was not above 2.5%.

However, in her speech on Monday, Yellen said that “It deserves emphasis that a 6.5% unemployment rate and inflation … that one-half percentage point above the [Fed’s] 2% objective are thresholds for possible action, not triggers that will necessarily prompt an immediate increase” in interest rates.

She said that if one or the other of those thresholds is crossed, Fed action to raise interest rates “is possible but not assured”.

In other words, Yellen indicated that in a situation where unemployment was still above 6.5% and the outlook for US inflation rose to, for example, 2.6% or 2.7%, the Fed might still keep the interest rate low in order to further stimulate business borrowing and possibly hiring.

Yellen holds the number two position at the Fed behind chairman Ben Bernanke. She is considered a possible successor to Bernanke.

The Fed has maintained the 0%-0.25% interest rate since December 2008 when the US was in the midst of the recent recession.

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

By: Joe Kamalick
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