New Monetary Guidance

By Isaac Cohen*

The last meeting of the US central bank policy making committee, chaired by Janet Yellen for the first time, produced several changes in monetary policy guidance.

No longer, for instance, the Federal Reserve will monitor exclusively the unemployment rate. The focus will widen to include labor market conditions, observing 10 indicators such as long term unemployment, part time employment, or the rate at which persons quit their jobs.

The committee confirmed the continuation of the gradual reduction of the monthly purchases of mortgage backed and Treasury securities, from $65 to $55 billion. Also, the committee said interest rates will be kept close to zero “for a considerable time,” even after the end of the asset purchase program. Then, at the press conference held after the end of the meeting, Chair Yellen clarified the meaning of “considerable time.” She said interest rate increases could start around six months after the end of the asset purchase program.

The markets understood the message falling sharply. At the end of the day, the Dow Jones Industrial Average was down 0.7 percent, in recognition that the end of easy money will come sometime next year.

To conclude, the statement said “change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions.” However, some observers were expecting a clearer explanation of why interest rates have to be kept low with declining unemployment.

*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio. Former Director, UNECLAC.


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