Fed stops targeting 6.5% unemployment
Flags fly over the Federal Reserve Building on December 16, 2008 in Washington, D.C.
UPDATED 3/19/2014, 2:15 p.m. ET: The Federal Reserve on Wednesday removed the unemployment rate as its key gauge of the economic strength of the country. Officials see it as too limiting a measure in making decisions on interest rates. In a statement the Fed said it would "assess progress…toward its objectives of maximum employment and 2 percent inflation."
“The slightly more rapid improvement in the unemployment picture might help explain an upward shift in [economic recovery outlook data," said Federal Reserve chief Janet Yellen. "I would simply warn you that these dots [data points] are going to move up and down over time… the end of 2016 is a long way out.”
Back in 2012, the Fed set an unemployment target of 6.5 percent, in an effort to send a signal that interest rates would stay low. Really low. For a long, long time.
David Wessel, head of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, says if you imagine you are the Fed, “You tell them, look, we are going to keep rates near zero until unemployment gets to 6.5 percent, and that seems to be an eternity away.”
“Well, now it’s March 2014,” Wessel says, “and unemployment is almost at this 6.5 percent threshold.”
The unemployment rate is currently 6.7 percent. But the Fed isn’t ready to bail on those low interest rates.
That 6.5 percent unemployment rate doesn’t represent the economic promised land it once did.
“We have to be a little bit careful about what goes into calculating that rate,” says Victor Li, an economics professor at Villanova University. The unemployment rate doesn’t fall just because a whole lot of people have found new jobs. “It can also go down because of people who are dropping out of the labor force,” Li says, “people who have become discouraged.”
And that’s been happening.
“It’s hard to find one number that really describes the unemployment rate,” Wessel, from Brookings, says, “and the labor market, and what’s happening to people dropping out of the job market.”
Perhaps the Fed this will describe its economic goals, instead of any specific number.