The first Federal Reserve policy meeting led by Janet Yellen as Fed Chair ended with no surprises but a change in guidance, as expected.
Still, stock and bond prices dipped on the news.
The Fed dropped language that tied future rate increases to an unemployment rate of 6.5% or lower. "WIth the unemployment rate nearing 6-1/2 percent, the committee has updated its forward guidance," according to a statement released by the Fed's Federal Open Market Committee (the current unemployment rate was 6.7%).
Now the Fed will decide whether to change its current 0-0.25% target rage for short-term rates based on an assessment of "progress--both realized and expected--toward its objectives of maximum employment and 2% inflation," the statement said.
The Fed also announced, as expected, a $10 billion decline in monthly asset purchases that began in January, reducing the total to $55 billion worth of long-term Treasuries and mortgage assets.
"As it turns out the unemployment rate is not a very good guide for the excess in the labor market," says Nariman Behravesh, chief economist at IHS. "The unemployment rate is falling...because a lot of people are leaving the labor force...The Fed has given itself more flexibility to look at other indicators to get a sense of the amount of tightness or lack thereof in labor markets."
Was the 6.5% unemployment rate threshold a mistake? "Probably," says Behravesh. "They're admitting, mistake or not, it was not the right indicator."
Another important part of the Fed's latest statement, says Behravesh, is the Fed's focus on inflation.
"They're missing their inflation target on the downside," he argues. "If they're serious about a 2% inflation target they've got to get it back up there."
All in all, Behravesh says the Fed is "admitting they have some work to do."
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