Fed eyes tying rates to an economic target

Federal Reserve chairman Ben Bernanke at a news Federal Reserve chairman Ben Bernanke at a news conference in Washington (Sept. 13, 2012) Photo Credit: Getty Images

advertisement | advertise on newsday

The Federal Reserve wants to find a clearer way to signal to the public when it might start raising interest rates.

The Fed has told investors that it plans to keep short-term rates low for at least another three years. But it appears to be leaning toward setting a more specific target, according to minutes from the Fed's last policy meeting.

Most members agreed at the Sept. 12-13 meeting that linking a future rate increase to a level of unemployment or some other numeric target could be useful. The minutes show members have yet to agree on what the economic target should be.

After last month's meeting, the Fed said it planned to keep its benchmark short-term rate near zero until mid-2015, six months later than it previously planned. The Fed also agreed at the meeting to spend $40 billion a month to buy mortgage-backed securities to drive longer-term interest rates lower.

The Fed has kept the short-term rate at a record low since December 2008.

Announcing the rate will stay low until mid-2015 is intended to help the economy by assuring borrowers and investors that loans would remain cheap for years.

Numeric targets now appear to be under consideration to provide additional guidance on future interest-rate moves.

advertisement | advertise on newsday

Charles Evans, president of the Fed's Chicago regional bank, has been the most vocal supporter of the change. He says the Fed should hold off on raising rates until the unemployment rate falls below 7 percent, as long as inflation doesn't exceed 3 percent.

Some members oppose such moves. They argue that by tying a rate hike to a level of employment, it raises the risk of leaving rates too low for too long, which heightens the threat of inflation.

You also may be interested in: