Fed minutes show change of criteria in setting rates

Federal Reserve officials decided in March that setting a target unemployment rate of 6.5 per cent as a threshold for an interest rate hike was an outdated policy and made a decision to explain new criteria for how it will assess the need for higher rates.

On Wednesday, the U.S. central bank released the minutes of its powerful Federal Open Market Committee, a group of its senior officials from around the country who compare notes on economic growth in their region. It also revealed that a special videoconference call was devoted to the issue of how to present guidance to the markets on rates.

• U.S. Fed cuts monthly bond-buying to $55B a month

• Fed chair Janet Yellen says low rates to linger

The minutes show the committee determined that as the unemployment rate was likely to fall below 6.5 per cent before long, it was appropriate to replace the existing quantitative thresholds. In February, U.S. unemployment stood at about 6.7 per cent, though many members of the committee noted the low participation rate of workers and the low wage gains for the American workforce.

Instead, Fed chair Janet Yellen told a press conference on March 19 that the Fed would be balancing unemployment statistics and the inflation rate, which it would like to see at close to two per cent, in making a decision on rates.

It announced it would continue the process of tapering, reducing the amount of U.S. bonds it buys every month to $55 billion US in April.

Yellen also rattled markets by saying the bond-buying program could be winding down by this fall, but she expects it will be a considerable period, a period she described as about six months after that before interest rates rise.

http://www.cbc.ca/news/business/u-s-fed-cuts-monthly-bond-buying-to-55b-a-month-1.2578807

The FOMC minutes released today show 13 of the 16 officials in the committee believed the federal funds rate will need to rise in 2015. Only one official believed rates should rise this year and two others said it could be 2016 before the conditions would be right.

The current federal funds rate, which in turn guides interest rates, is at 0-.25 per cent and the majority of FOMC members believed it will need to rise by on 25 or 50 basis points in 2015.

However, the minutes show the Fed is looking at qualitative measures, such as household spending and business investment, as well as unemployment and inflation. There was much difference of opinion in how to convey this to investors, without hurting market sentiment.

The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal, the minutes say.

The minutes reveal the Fed was concerned about lower-than-expected growth in the American economy, but blamed the bitter winter for part of the slowdown.

Stock and bond investors interpreted todays release to show that the Fed plans to favour low short-term rates longer than many had assumed. Stocks rose sharply after the minutes were released, and bond yields fell.

The Dow Jones industrial average, which had risen modestly before the minutes were released, was up 154 points 30 minutes later.

Investors have been intensely following the Fed's guidance on rates because higher short-term rates would elevate borrowing costs and could hurt stock prices.