Yellen says Fed should tie rate out­look to eco­nomic goals

The Pak Banker - - Front Page -

NEW YORK

Fed­eral Re­serve Vice Chair­man Janet Yellen backed a pro­posal to link the Fed’s zero in­ter­est-rate pol­icy to progress to­ward meet­ing its goals for in­fla­tion and em­ploy­ment rather than to a cal­en­dar date. The Com­mit­tee might elim­i­nate the cal­en­dar date en­tirely and re­place it with guid­ance on the eco­nomic con­di­tions that would need to pre­vail be­fore liftoff of the fed­eral funds rate might be judged ap­pro­pri­ate,” Yellen said Wed­nes­day in the text of re­marks pre­pared for a speech in Berke­ley, Cal­i­for­nia. She is “strongly sup­port­ive” of such a change, she said.

Yellen Wed­nes­day joined three other Fed of­fi­cials who have en­dorsed ty­ing zero in­ter­est rates with progress on fight­ing un­em­ploy­ment as a way to pro­vide more clar­ity on the cen­tral bank’s out­look for mone­tary pol­icy.

The pol­icy-set­ting Fed­eral Open Mar­ket Com­mit­tee said last month it ex­pects to keep its bench­mark rate near zero through at least mid-2015. “Un­der such an ap­proach, liftoff would not be au­to­matic once a thresh­old is reached,” Yellen said at the Univer­sity of Cal­i­for­nia at Berke­ley, where she is a pro­fes­sor emer­i­tus. “That de­ci­sion would re­quire fur­ther Com­mit­tee de­lib­er­a­tion and judg­ment.”

The Fed may adopt the ap­proach as soon as its next meet­ing Dec. 11-12, said Ward McCarthy, chief fi­nan­cial econ­o­mist at Jef­feries Group Inc in New York and a for­mer Rich­mond Fed econ­o­mist.

“They’ve been kick­ing around the idea of chang­ing the com­mu­ni­ca­tions pol­icy for a while, and she pretty much summed it up,” McCarthy said. “They want to put rate guid­ance in the con­text of the dual­man­date ob­jec­tives. That was prob­a­bly the main dis­cus­sion at the most re­cent FOMC meet­ing.” Since June 2011, Yellen has led a com­mit­tee cre­ated by Ben S. Ber­nanke to shed light on Fed de­ci­sion-mak­ing and min­i­mize pub­lic con­fu­sion over its goals. The cen­tral bank in Jan­uary took one of its big­gest steps ever to­ward greater open­ness by pub­lish­ing a mis­sion state­ment, an in­fla­tion tar­get and anony­mous fore­casts by each FOMC par­tic­i­pant for the bench­mark in­ter­est rate.

“We’ve made progress, but much work re­mains to be done,” Yellen, 66, said to­day. Stocks fell to­day as in­vestors watched for progress on Europe’s debt cri­sis and Wash­ing­ton’s bud­get de­bate. The Stan­dard & Poor’s 500 In­dex slid 0.4 per­cent to 1,374.53 at the close of trad­ing in New York. Trea­sury 10-year note yields fell two ba­sis points to 1.59 per­cent af­ter ear­lier fall­ing to 1.57 per­cent, the low­est level since Sept. 5.

Last year, Chicago Fed Pres­i­dent Charles Evans first called for the cen­tral bank to tie pol­icy to spe­cific nu­mer­i­cal thresh­olds, say­ing it should keep rates near zero un­til un­em­ploy­ment falls be­low 7 per­cent or in­fla­tion rises above 3 per­cent.

In Septem­ber, Min­neapo­lis Fed Pres­i­dent Narayana Kocher­lakota en­dorsed a vari­a­tion of the pledge, call­ing for low rates un­til job­less­ness falls to 5.5 per­cent as long as in­fla­tion re­mains be­low 2.25 per­cent.

Bos­ton Fed Pres­i­dent Eric Rosen­gren said on Nov. 1 the cen­tral bank should buy mort­gage bonds un­til the job­less rate falls to 7.25 per­cent and hold the tar­get in­ter­est rate near zero un­til hit­ting 6.5 per­cent un­em­ploy­ment.

Yellen to­day said the Fed’s 2 per­cent in­fla­tion goal set in Jan­uary should not be viewed as a ceil­ing, ar­gu­ing that such an in­ter­pre­ta­tion would lead to in­fla­tion that’s more fre­quently be­low the tar­get than above. “To bal­ance the chances that in­fla­tion will some­times de­vi­ate a bit above and a bit be­low the goal, 2 per­cent must be treated as a cen­tral ten­dency around which in­fla­tion fluc­tu­ates,” she said.

The FOMC’s 19 par­tic­i­pants are also con­sid­er­ing changes to the Fed’s quar­terly pub­li­ca­tion known as the Sum­mary of Eco­nomic Pro­jec­tions.

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