Fed Too Familiar With Lost Workers Seeks New Guideposts
By Caroline Salas Gage - Sep 30, 2013
Its becoming increasingly clear why Federal Reserve Chairman Ben S. Bernanke should have avoided linking the central banks policy decisions to specific unemployment rates.
Bernanke said in June he expected the Fed would complete its bond buying when the jobless level was around 7 percent, and policy makers have pledged since December they wont consider raising interest rates as long as it exceeds 6.5 percent. With a decline in August to 7.3 percent for the wrong reason -- Americans giving up on finding work -- Fed officials are being forced to shift their guideposts.
The flawed measure has contributed to the markets confusion over the direction of monetary policy, and Fed officials now are struggling with how to minimize it as a policy benchmark without damaging their credibility, according to Ethan Harris, co-head of global economics research at Bank of America Corp. in New York. The Federal Open Market Committees Sept. 18 decision not to taper its $85 billion in monthly bond buying surprised investors across the globe.
Picking the unemployment rate as the key growth-side indicator was a huge mistake for the Fed, said Harris, one of the few economists to correctly predict the Fed wouldnt taper in September. It was supposed to be a marker that the average Joe could look at and say, Ah! OK, now weve hit a broad-based recovery. Now, theyve almost immediately abandoned it.
The day of the decision, Bernanke downplayed the 7 percent threshold he gave in June for the end of the central banks quantitative easing, saying unemployment is not necessarily a great measure of the job market. He also suggested the 6.5 percent level for interest-rate increases may be too high.
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http://www.bloomberg.com/news/2013-09-29/fed-too-familiar-with-lost-labor-seeking-new-message-for-policy.html