Federal Reserve policymakers will likely leave intact their delicately worded easy-money message when they meet next week, despite a surprisingly sharp drop in U.S. unemployment that threatens to make a central part of that message irrelevant.
Top Fed officials believe their landmark decision last month to reduce the pace of the U.S. central bank’s bond-buying stimulus was well received by financial markets. That, in turn, allows them to make another $10 billion cut to the bank’s monthly bond purchases at the January 28-29 meeting without needing to adjust their promise to keep interest rates low in the future.
As the promise stands, the Fed has said it expects to keep rates near zero until well past the time unemployment falls below 6.5 percent, especially if inflation remains low. Joblessness dropped faster than expected last year and hit 6.7 percent in December, down from 7.0 percent the previous month.
Had the drop in unemployment sparked a selloff in bonds, the Fed might have reinforced its commitment to stimulus by tampering with its low-rates promise. But investors appear to have interpreted the data as a one-off event that would not prompt a quicker-than-expected policy tightening.
So policymakers at next week’s meeting – Fed Chairman Ben Bernanke’s last before handing the reins to Vice Chair Janet Yellen – will probably stick to the same message, saving any big changes for the future.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.