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Unemployment to lose spot for forward guidance, Fed minutes say
WASHINGTON (2/20/14)--It appears the unemployment rate will be knocked out of its spot in providing forward guidance to the Federal Open Market Committee, according to minutes from its Jan. 28-29 meeting.
 
The Fed's policymaking body released its minutes Wednesday, which said, "Participants agreed that, with the unemployment rate approaching 6.5%, it would soon be appropriate for the Committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed."
 
The FOMC's post-meeting statement said the "current exceptionally low target range for the federal funds rate of 0% to 0.25% will be appropriate at least as long" as the unemployment rate remains above 6.5% (News Now Jan. 29).
 
"A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon," the minutes noted.
 
Some favored quantitative guidance along the lines of existing thresholds such as the 2% target inflation rate. Additional proposals included relying more on the Summary of Economic Projections and "an indication of the Committee's willingness to adjust policy to lean against undesired changes in financial conditions."
 
Moody's Economy.com said the Fed has options. "It could stress the importance of other employment data improving before it begins to normalize interest rates. For example, the Fed could focus on the labor force participation rate or employment-to-population rate," analysts noted (Feb. 19).
 
The policymaking group said it would add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.
 
"Several participants argued that, in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting," the minutes said. "That said, a number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases."
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