Fed fails to indicate what labor market signal will be

The Fed announced today that it will continue its tapering program, reducing purchases of long-term Treasury bonds from $35 billion per month to $20 billion per month, and cut back on its mortgage-backed securities purchases by $5 billion as well, to $25 billion. These results came as expected, with the $10 billion monthly decrease continuing each month. The bigger news was the Fed’s announcement on whether it will start to bring rates back up as the targeted 6.5% unemployment rate is due to be met in the upcoming weeks.

On Wednesday, the Wall Street Journal reported that “the Fed dropped the reference to the 6.5% jobless rate, which officials have come to see as too limited an indicator of the labor market’s health.” The proclamation of being “too limited an indicator” tells true, as unemployment rates have sunk in some part due to discouraged workers dropping out of the work force entirely after failing to find employment. However, the Fed offered little insight on what they believed better labor market indicators to be, or when they will determine that the economy has shown enough recovery. The stock market fell after the news, on the idea that rates may be rising sooner than previously expected.

The majority of Fed officials on Wednesday predicted that rates will begin to increase within the year, with 10 of 16 expecting increases to begin in 2015. The real news of the day was the ambiguity that the Fed left in its wake. Will a 6% unemployment rate be enough to spark a rate increase, or is the unemployment rate now discredited by the Fed as a worthy indicator? What should Americans expect moving forward, and when will the recession really end? According to Fed Chairwoman Janet Yellen, a multitude of factors will tell her when the time is right.

“Ms. Yellen said her dashboard for monitoring economic progress would include
the share of workers who have been unemployed for six months or more, the share
of adults who are holding or seeking jobs and the portion of workers who hold
part-time jobs but say they would rather have full-time occupations.” – WSJ

So while the news coming out of the meetings leaves more to be desired in terms of understanding the actual state of the economy and strength of the labor market, expectations can be made moving forward. All indicators show that the tapering process will continue as planned, $10 billion less bond purchases happening each month, and depressed rates while inflation sits below its targeted level. While the new measure for the state of the labor market certainly is more indicative of its actual all-around health, the Fed left much doubt for when it will finally be ready for a rate increase.