Clarification from Fed: Interest rate increases not tied to timeline
Wednesday, April 7, 2010
Any decision by the Federal Reserve to end its policy of ultra-low interest rates would come in response to economic data and not according to any predetermined schedule, leaders of the central bank made clear in minutes of their last meeting released Tuesday.
For more than a year, the Fed has said it expects to leave its target interest rate "exceptionally low" for "an extended period." But the length of that extended period has been up for debate, and some policymakers have said it means that rates will stay near zero for at least six more months.
With the release of minutes of their March 16 meeting, Fed officials offered more clarity, essentially stating that there is no fixed timetable.
A number of central bank leaders said their expectation of continued low rates "was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time," the minutes said.
The new language is an attempt by the central bank to keep its options open and emphasize the conditionality of its future rate policy. Some officials have worried that by promising to keep rates low for an "extended period," the Fed is in a box, in that once the language changes, financial markets will view a rate increase as imminent.
The new language from the Fed aims to maintain the flexibility to increase rates quite soon, if the economy takes off, or hold off for a very long time if it lags.
On the question of when the Fed might raise its target short-term interest rate above its current range of zero to 0.25 percent, the new minutes suggest that Fed leaders continue to see plenty of signs of weakness in the economy that would justify leaving rates low.
While meeting participants "saw incoming information as broadly consistent with continued strengthening of economic activity, they also highlighted a variety of factors that would be likely to restrain the overall pace of recovery." Those factors include the end of fiscal stimulus programs and the fact that changes in business inventories will not contribute to economic growth the way they did late last year.
Inflation fears, meanwhile, appeared to be minimal, as policymakers "referred to a wide array of evidence as indicating that underlying inflation trends remained subdued."
Some policymakers, according to the minutes, thought that the risks of starting rate hikes too early exceed those of waiting too long because the Fed could always raise rates more aggressively down the road if inflation became a problem, but would have less leeway to correct later if it increased rates too soon.
The labor market continues to show signs of steady improvement. The number of job openings dipped slightly in February, but maintained most of a large increase from January, suggesting that employers are on the verge of hiring, according to a Labor Department survey released Tuesday.
And in promising news, the number of layoffs fell to 1.82 million, the lowest level since February 2007, well before the beginning of the recession.