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Yellen to set tone for interest-rate language

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WASHINGTON (3/18/14)--Today, Janet Yellen leads the first Federal Open Market Committee meeting as chair, and economists are keeping an ear out not only for what she says, but how she says it.
 
The Fed has been linking the interest rate to the unemployment rate, but according to the Jan. 28-29 meeting minutes, the federal policy-making committee is looking to change its forward guidance ( News Now Feb. 20).
 
Now is the time for the Fed to revamp its forward guidance tool, analysts say. With the current near- zero interest rates and a continued drawdown of its monthly asset-bond purchases program, "they've got a little room to unanchor these things," said Lewis Alexander, chief economist, Nomura Holdings Inc. ( MarketWatch March 17).
 
Forward guidance primarily has been a repeated commitment to keep short-term interest rates--0% to 0.25%--as long as or "well past" the unemployment rate of 6.5%.
 
Yellen has indicated she would be comfortable with the move away from the unemployment rate, analysts said. The unemployment rate did not fully capture the health of the labor market, she told the Senate Banking Committee last month, especially considering the drag that severe winter weather has had across all economic indicators.
 
New "holistic" guidance is likely to be "be less specific and more ambiguous and point to a variety of indicators," Jeffrey Cleveland, chief economist, Payden and  Rygel, told MarketWatch .
 
Analysts forecast the fed funds rate will be 0.6% by the end of 2015.