Finance Column » Your Money This Week » When a target may not be a target

When a target may not be a target

By Mark Hamrick · Bankrate.com
Monday, March 4, 2013
Posted 11 am ET

Federal Reserve Vice Chair Janet Yellen says the central bank won't necessarily begin to raise interest rates just as soon as the unemployment rate goes down to 6.5 percent. The specific target for the unemployment rate was offered in December, along with more specific inflation targeting, framing the time that "highly accommodative stance of monetary policy," or low interest rates, will be called for.

In a Washington, D.C., speech at a conference of the National Association for Business Economics, Yellen said she believes the Fed should continue with asset purchases known as quantitative easing.

Yellen is seen as the most likely candidate to succeed Chairman Ben Bernanke, whose term is scheduled to end in January 2014.

Yellen said that, while the "FOMC's new forward guidance offers considerable insight into the committee's likely reaction," she added that "the guidance it provides is not complete." That seems to indicate that the Fed has more wiggle room than might have otherwise been thought.

She said the Fed's "guidance specifies thresholds for possible action, not triggers that will necessarily prompt an increase in the federal funds rate."

What might be the triggers?

So what are some of the other factors that could come into play to keep the Fed from taking away the proverbial punchbowl, or keep it from raising rates even after unemployment hits 6.5 percent or below?

Yellen cited several possibilities, including if inflation remains remarkably low, or if the Fed believes that the unemployment rate "significantly understates the actual degree of labor market slack." An example of how the unemployment rate might understate the pain: The jobless rate drops because many unemployed give up looking for work.

On the potential costs or risks of the $85 billion in monthly asset purchases, Yellen said, "At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program." And in a direct challenge to critics of the Fed, she said, "To address one concern that I have heard, there is no evidence that the Federal Reserve's purchases have impaired the functioning of financial markets."

Echoing remarks made last week by Chairman Bernanke, Yellen detailed specific factors being watched by the Fed for signs of frothy markets. "I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability," she said.

Yellen indicated the Fed will continue to watch closely for signs of trouble, which she admitted is a big risk. As she put it, "Financial stability concerns, to my mind, are the most important potential cost associated with the current stance of monetary policy."

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