Fed to link in­ter­est rates to un­em­ploy­ment lev­els

Fed­eral Re­serve makes clear to mar­kets what will drive pol­icy.

Austin American-Statesman - - THE SECOND FRONT - By Martin Crutsinger AN­DREW HARRER / BLOOMBERG

WASHINGTON — The Fed­eral Re­serve sent its clear­est sig­nal to date Wed­nes­day that it will keep in­ter­est rates low to sup­port the U.S. econ­omy even af­ter the job mar­ket has im­proved sig­nif­i­cantly.

The Fed said it plans to keep its key short­term rate near zero un­til the un­em­ploy­ment rate reaches 6.5 per­cent or less — as long as in­fla­tion re­mains tame. Un­em­ploy­ment is now 7.7 per­cent.

For the first time, the Fed is mak­ing clear to in­vestors and con­sumers that it will link its ac­tions to spe­cific eco­nomic mark­ers.

The plan adds de­tail to what the Fed had said be­fore: that it ex­pects to keep the rate low un­til at least mid-2015.

“This ap­proach is supe- rior” to set­ting a timetable for a pos­si­ble rate in­crease, Chair­man Ben Ber­nanke said at a news con­fer­ence. “It is more trans­par­ent and will al­low the mar­kets to re­spond quickly and promptly to changes” in the Fed’s eco­nomic out­look.

Ber­nanke made clear that even af­ter un­em­ploy­ment falls be­low 6.5 per­cent, the Fed might de­cide that it needs to keep stim­u­lat­ing the econ­omy. Other eco­nomic fac­tors will also shape its pol­icy de­ci­sions, he said.

“The Fed has be­come more ex­plicit and more trans­par­ent,” said Steven Wood, chief econ­o­mist at In­sight Eco­nom­ics. “This should pro­vide the mar­kets with much more clar­ity around mon­e­tary pol­icy ac­tion in the up­com­ing year.”

The Fed said it will also keep spend­ing $85 bil­lion a month on bond pur­chases to drive down long-term bor­row­ing costs and stim­u­late growth. Those pur­chases are in­tended to spur bor­row­ing and spend­ing.

Fed­eral Re­serve Chair­man Ben Ber­nanke speaks Wed­nes­day in Washington.

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