WASHINGTON: When the Federal Reserve offers its latest word on interest rates today, few think it will telegraph the one thing investors have been most eager to know: When it will slow its bond purchases, which have kept long-term borrowing rates low.
The Fed might choose to clarify a separate issue: When it may raise its key short-term rate. The Fed has kept that rate near zero since 2008. It’s said it plans to keep it there at least as long as unemployment remains above 6.5 percent and the inflation outlook below 2.5 percent.
Unemployment is now 7.6 percent; the inflation rate is roughly 1 percent.
Chairman Ben Bernanke has stressed that the Fed could decide to keep its short-term rate ultra-low even after unemployment reaches 6.5 percent. Testifying to Congress this month, Bernanke noted that a key reason unemployment has declined is that many Americans have stopped looking for jobs. When people stop looking for work, they’re no longer counted as unemployed.
If that trend continues, Bernanke said that lower unemployment could mask a still-weak job market and the Fed might feel short-term rates should stay at record lows.
In the statement the Fed will issue when its two-day meeting ends today, it could specify an unemployment rate below 6.5 percent that would be needed before it might raise its benchmark short-term rate. It might also say that it won’t raise that rate if inflation fell below a specific level.
Investors would react to any such shift in the Fed’s guidance. Financial markets have been pivoting for months on speculation.