Fed’s Forward Look Dumps Unemployment Rate

The Federal Open Market Committee (FOMC) of the Federal Reserve said in its March statement it will dump the 6.5% unemployment rate threshold to push forward rate guidance. 

Eliminating the threshold based on the unemployment rate when considering raising interest rates “does not indicate any change in the committee’s policy intentions,” the Fed said in a statement.

The committee said it continues to anticipate maintaining the current target range for the federal funds rate “for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

Seizing on “considerable time,” reporters pressed Janet Yellen, the new chairman of the Fed, for more details. Yellen, at her first press conference, answered by saying that the target range will continue for at least some six months after the Fed ends its bond-buying program.

Yellen may have had a slight gaffe, according to those in the industry. “I think it was an off-the-cuff remark in response to a press question,” says Thomas Urano, managing director of Sage Advisory, an independent fixed-income asset management firm. “I think she was clear that the actions by the FOMC will respond to evolution of market, labor and inflation conditions,” he tells PLANADVISER.

The comment about six months was made in response to someone trying to pin her down, and perhaps Yellen was a bit jittery, he surmised: “[Former Fed chairman Ben] Bernanke was always very well spoken and very clear, and very slippery. He wasn’t going to let himself be pinned down.” 

Rates Unlikely to Soar

Urano says the Federal Reserve will likely spend the next few weeks trying to back away from Yellen’s remark, depending on how the economy evolves. (Despite Yellen’s six-month mention, Urano calls skyrocketing rates unlikely.)

The Fed shifted toward a qualitative rather than a quantitative approach, Urano adds, attending now to a broader range of macro-economic indicators rather than using a specific number trigger. “A more broadly flexible way to review the market is a more appropriate way to handle policy, because it has to respond to the market,” he says. “They did the right thing in transitioning the directive.”

Urano notes that the Fed lowered expectations for growth and inflation. The bigger picture, he says, is that they downgraded the assessment of the economy but slightly pushed up expectations of rate raises. “I think in the end maybe they don’t raise rates,” Urano says, “not a short six-month window.”

The real risk is that front-end rates will continue to shift higher. “Short rates could start to drift higher in anticipation of federal rates,” Urano says. “I think in the short term it’s a pretty big adjustment. We think the economic data reversed course from the first quarter, but that was weather related. I’m expecting the market to take the strengthening data and marry the [Fed]statement from yesterday—and that will put pressure on the front end of the curve.” Urano says there are still headwinds in emerging markets and the growth rate of China, as well as in U.S. growth, if the economy doesn’t accelerate.