Fed Rates Tied to Employment Data for the First Time

Much of the Federal Reserve’s monetary policy public statement on the heels of its Federal Open Market Committee’s (FOMC) meeting Wednesday was reaffirming long-held policies when it came to Treasury securities purchases and interest rates. However, an increasingly talkative Federal Reserve did shock some market-watchers by tying its stance on the federal funds rate to employment growth.

For the first time in the Ben Bernanke’s era as Fed chairman, the FOMC noted it will hold the target range for the federal funds rate at between 0% and 0.25% until the unemployment rate sinks to or below 6.5%. The Fed – which noted continued moderate economic expansion (aside from weather/Sandy-related problems) and concern over risks associated with “strains in global financial markets” – also tied the historically low range’s stay to inflation rates being no more than one-half percentage point above the FOMC’s 2% longer-run goal. All but Jeffrey Lacker voted for the decision.

"Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability," the Fed noted in its uncharacteristically long statment. "The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."

Otherwise, the committee plans stay the course on recent policy initiatives by "continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month...purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month...maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction."

-Brian Shappell, CBA, NACM staff writer

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