Fed Won’t Raise Rates Until Unemployment Falls to 6.5 Pct

Dec 12, 2012 1:22pm

For the first time in its history the Fed has announced explicit targets for both inflation and unemployment in setting monetary policy.

The Fed said today that it will not raise short-term interest rates until the unemployment rate drops below 6.5 percent and if  inflation “between one and two years ahead” is projected to be no more than 2.5 percent.

While the country’s job market appears to be recovering, 12 million people still remain unemployed. The nation’s unemployment rate is currently 7.7 percent, the Labor Department reported Friday.

Federal Reserve chairman Ben Bernanke has repeatedly stressed that the central bank’s policies were focused on lowering unemployment, but it had not announced a target jobless rate. Unemployment was last below 6.5 percent in October 2008, while interest rates have been set near zero since then.

In a separate but widely expected move the Fed says it will spend $45 billion a month to keep long-term interest rates low.  This move will replace the so-called Operation Twist which is expiring this month.

The Federal Reserve first announced a debt swap, dubbed Operation Twist, in September 2011, selling $400 billion of long-term securities for an equal amount of shorter-term instruments, and has since extended the program past its expiration this past June.

The Fed’s actions today involve an expansion of the Fed’s balance sheet to nearly $3 trillion or what we often call “printing money.”

Critics say that this is an unnecessary move risking inflation in the future.  Others argue that there has been barely any inflation for the last several years, and the Fed need to act to help the poor economy.

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