Analysis: Fed mulls adjusting its tune to quell jittery markets

Fri Jul 12, 2013 1:07am EDT
 
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By Ann Saphir and Jonathan Spicer

(Reuters) - Federal Reserve officials are considering moving the goal posts on U.S. monetary policy with a promise to keep interest rates low for longer in the hopes of heading off a troubling rise in market-set borrowing costs.

Top Fed officials, who have pulled out all the stops to boost the U.S. recovery from recession, have worried for months that investors might drive bond yields up when the time came to reduce the central bank's bond-buying program.

Their fears have started to become reality. Yields, which move inversely to the price of Treasury debt, began to climb sharply in May with signs of stronger jobs growth and signals from the Fed that it could begin to scale back its bond purchases, known as quantitative easing, as soon as September.

With yields rising, some Fed officials warmed to the idea of anchoring borrowing costs more firmly by pledging to keep overnight rates near zero well after the jobless rate falls below 6.5 percent, the Fed's current threshold for considering tighter monetary policy. Unemployment stood at 7.6 percent in June.

Fed Chairman Ben Bernanke raised the prospect of a lower threshold for the jobless rate last month, but the message was lost in the din created when he said the central bank's policy-setting Federal Open Market Committee planned to halt the bond purchases by mid-2014 - a comment that sent bond yields soaring.

"I do think there are lot of FOMC members who would want to keep zero rates as long as possible, particularly during the QE exit," said Bluford Putnam, chief economist at futures exchange operator CME Group and a former New York Federal Reserve Bank economist. "So, they might argue down the road to change that 6.5 percent to 6.0 or something."

The president of the Minneapolis Fed, Narayana Kocherlakota, championed the idea nearly a year ago when he called for a 5.5 percent threshold for the jobless rate - and he hasn't backed down since.

Kocherlakota argued that if households and businesses believe the Fed will start jacking up rates when unemployment is still well above what most economists consider healthy, borrowing, spending and hiring levels would be lower than what they would if they think the Fed will wait until the job market returns to normal.   Continued...

 
A trader looks up at a chart on his computer screen while working on the floor of the New York Stock Exchange shortly after the market opening in New York July 11, 2013. REUTERS/Lucas Jackson