Fed mulls new rate hike approach
October 6, 2012, 12:10 am TWN
WASHINGTON -- The U.S. Federal Reserve is considering linking any increases of its ultra-low benchmark interest rate to specific targets for joblessness and inflation, official documents showed Thursday.
The move, if implemented, would amount to a significant change in the U.S. central bank's approach to how it signals the future course of interest rates, which have been locked at near-zero for nearly four years.
Rather than the current approach of averaging the forecasts for interest rates of the members of the Federal Open Market Committee (FOMC), committee members felt a more clear signal could involve tying a future rate rise to achieving a specific unemployment rate and/or inflation rate.
“Many participants thought that more effective forward guidance could be provided by specifying numerical thresholds for labor market and inflation indicators that would be consistent with maintaining the federal funds rate at exceptionally low levels,” the minutes to the Sept. 12-13 policy meeting said.
The discussion reflected the deep concern in the Fed that the economy is not growing fast enough to bring unemployment down below the current 8.1-percent level.
The Fed wants to be sure businesses and markets understand its commitment to its ultra-low rate policy as they fashion their own investment policies.
But FOMC members were not confident to proceed with the idea at the time of the September meeting, which ultimately decided to launch a new open-ended bond-buying stimulus program, QE3, to boost the economy.
“At the conclusion of the discussion, most participants agreed that the use of numerical thresholds could be useful to provide more clarity about the conditionality of the forward guidance but thought that further work would be needed to address the related communications challenges,” the minutes said.