Thu, Nov 15, 2012 - Page 15 News List

Yellen backs link to economic goals

SEEKING CLARITY:The Federal Reserve’s vice chairman is the latest Fed official to support tying zero interest rates with progress on fighting unemployment

Bloomberg

US Federal Reserve Vice Chairman Janet Yellen threw her support behind proposals to tie the central bank’s low-rate outlook to economic goals, raising the odds the Fed will replace its current commitment to a calendar date.

“The committee might eliminate the calendar date entirely and replace it with guidance on the economic conditions that would need to prevail before liftoff of the federal funds rate might be judged appropriate,” Yellen said on Tuesday in a speech in Berkeley, California.

She is “strongly supportive” of such a change, she said.

Yellen joined three other Fed officials who have endorsed tying zero interest rates with progress on fighting unemployment as a way to provide more clarity on the central bank’s outlook for monetary policy.

The policy-setting Federal Open Market Committee (FOMC) said last month it expects to keep its benchmark rate near zero through at least mid-2015.

“Under such an approach, liftoff would not be automatic once a threshold is reached,” Yellen said at the University of California at Berkeley, where she is a professor emeritus. “That decision would require further committee deliberation and judgement.”

The Fed, which is required by the US Congress to pursue the twin goals of full employment and price stability, may adopt the strategy as soon as its next meeting on Dec. 11 and Dec. 12, said Ward McCarthy, chief financial economist at Jefferies Group Inc in New York and a former Richmond Fed economist.

“They’ve been kicking around the idea of changing the communications policy for a while, and she pretty much summed it up,” McCarthy said. “They want to put rate guidance in the context of the dual-mandate objectives. That was probably the main discussion at the most recent FOMC meeting.”

Policymakers may need more time to reach agreement on details of a new framework, said Roberto Perli, a managing director at International Strategy and Investment Group Inc in Washington.

Still, Yellen “wouldn’t have supported those ideas if the committee didn’t have consensus about moving in that direction,” said Perli, a former economist for the Fed’s Division of Monetary Affairs.

Since June last year, Yellen has led a committee created by Fed Chairman Ben Bernanke to shed light on Fed decision making and minimize public confusion over its goals. Fed officials say that greater transparency makes their actions more potent because the economy is affected by public expectations about the future policy.

“We’ve made progress, but much work remains to be done,” Yellen, 66, said on Tuesday.

She said tying the outlook for low interest rates to economic thresholds, rather than a date, “would enable the public to immediately adjust its expectations concerning the timing of liftoff in response to new information affecting the economic outlook.”

Last year, Chicago Fed President Charles Evans first called for the central bank to tie policy to specific numerical thresholds, saying it should keep rates near zero until unemployment falls below 7 percent or inflation rises above 3 percent.

In September, Minneapolis Fed President Narayana Kocherlakota endorsed a variation of the pledge, calling for low rates until joblessness falls to 5.5 percent as long as inflation remains below 2.25 percent.

Boston Fed president Eric Rosengren said on Nov. 1 that the central bank should buy mortgage bonds until the jobless rate falls to 7.25 percent and hold the target interest rate near zero until hitting 6.5 percent unemployment.

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