If there is one benchmark Americans recognize with respect to the economy and monetary policy, it’s the unemployment rate falling below 6.5 percent. From there, it was expected the Federal Reserve policy of bond buying known as quantitative easing would lighten, allowing interest rates to rise. After the latest job report showed improvments in the number of jobless yet weaker hiring volumes, economists expect that original benchmark will have to change to accommodate economic crosswinds.
Too much progress
Though there were mixed signals in the job report that appeared Friday, February 7, the unemployment rate fell to 6.6 percent. That figure equaled the lowest number of jobless Americans since October 2008 while giving rise to speculation it could drop to below the Fed’s threshold for changing monetary policy within months. When Ben Bernanke spoke about the Fed’s benchmark for unemployment in December 2012, The New York Times reported that central bank officials saw that happening at the end of 2015.
Little more than a year later, Bernanke’s successor has to grapple with the faster-than-expected fall in unemployment. New Fed Chair Janet Yellen was one of the supporters within the Fed of monetary policy tied to jobless rates rather than calendar dates. Now she is likely to call for a revision of that benchmark in light of discouraging economic data accompanying the good news on unemployment.
The bad news
Several elements of the February 8 jobs report suggested the recovery was being outpaced by the jobless rate. A gain of 113,000 jobs in January followed an even weaker December after an average of 194,000 jobs per month in 2013. However, the report also indicated that those who had given up on finding work had come out of the cold.
According to The Associated Press, the number of people looking for work in January went up, which many consider a sign of optimism when more had given up the job hunt in December. The complexity of the jobs data suggests benchmarks such as the one the Fed established don’t take into account other factors behind the unemployment rate, hiring figures included.
The Fed may need to remind its audience of its exact wording on how it will treat interest rates when the unemployment count drops below 6.5 percent.
Revising Fed policy
According to Reuters, the President of the Richmond Federal Reserve told reporters on February 4 that the Fed “will have to reformulate [the guidance] and provide some qualitative way of providing an assessment of what time horizon we think is most likely.” Economists expect the Fed could lean on the clause suggesting it would continue its quantitative easing policy “well past the time” the jobless rate falls under 6.5 percent.
The devil is in the details. Yellen’s appearance in front of Congress on February 11 may offer insight as to how she and the central bank will approach the shift away from unemployment rates. In any event, it has to be done with great tact, as investors hang on every word emerging from the Federal Reserve. Carl Tarnnenbaum, the chief economist from Northern Trust, told Reuters it’s all about the message.
“I believe that the success of that effort is going to hinge critically on the Fed’s communication with markets,” Tannenbaum said. That’s a delicate dance for Yellen to make in her opening performance as Fed Chair.