Fed to link interest rates to unemployment levels
Federal Reserve makes clear to markets what will drive policy.
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.