US Fed Under Yellen Might Become Less Specific in Statements

anet Yellen’s first policy-setting meeting as chair of the U.S. Federal Reserve will focus on how to finesse a rewriting of the central bank’s promise to keep interest rates low without roiling financial markets.

Fed policymakers will probably decide next week to scrap their threshold of a 6.5 percent unemployment rate for considering a rate rise, and instead embrace new language that is less specific about when tighter policy might come.

The threshold has been a staple of the central bank’s so-called forward guidance since December 2012, when it was first adopted to underscore a commitment to stimulus until the U.S. economy was on surer footing.

But the U.S. unemployment rate has come down with surprising speed, and now stands at 6.7 percent, leaving Fed officials anxious to adopt guidance more in keeping with their view that the economy won’t be ready for higher rates for some time to come. The trick for Yellen will be re-crafting the statement without changing expectations in markets, which currently don’t see a rate rise until midway through next year.

“This is probably a reasonable time to revamp the statement to take out that 6.5 percent threshold because it’s not really providing any great value,” William Dudley, the influential president of the New York Fed, said last week. “I’d rather do it before we reach the threshold rather than after.”

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza