Wednesday, August 20, 2014

Fed more divided on U.S. labor-market gains

Fed more divided on U.S. labor-market gains

Published: Aug 20, 2014 2:20 p.m. ET
WASHINGTON (MarketWatch) — Top U.S. central bankers say the nation’s labor market is improving faster than expected, but the Federal Reserve is still not convinced it’s strong enough to alter interest rates anytime soon, according to minutes of the bank’s last big meeting in late July.
And in an important step, the Fed has agreed to use interest rates on excess reserves as its main tool to set the federal funds rate in the future.
Senior Fed officials appeared more divided on how rapidly the U.S. labor market is improving at the July 29-30 meeting of the Federal Open Market Committee. The U.S. posted its best six-month stretch of hiring in the first half of 2014, for example, and the unemployment rate recently fell to a six-year low of 6.1%. Read FOMC minutes.
Yet a majority of Fed officials argued the falling unemployment rate has exaggerated how quickly the labor market is improving. They pointed to a still-high number of long-term unemployed and weak wage growth as evidence that much more progress is needed before the Fed considers altering its go-slow policy on short-term interest rates.
The Fed’s policy-setting committee “agreed to state that labor market conditions improved … while also stating that a range of labor market indicators suggested that there remained significant underutilization of labor resources,” the minutes said.
The FOMC voted 9-1 to maintain its current policy of slowly withdrawing stimulus from the U.S. economy. The majority also reiterated the Fed is likely to keep the short-term federal funds rate below what is considered normal for “some time.
Philadelphia Fed President Charles Plosser, the only dissenter, argued that his colleagues underplayed the improvement in the labor market and a rise in inflation toward the banks’ intended 2% target. He warned U.S. financial markets could get disrupted if the Fed had to act sooner than it plans to raise interest rates.
Wall Street might get more clues on the Fed’s intentions when Chairwoman Janet Yellen delivers a speech on Friday in Jackson Hole, Wyo., on why the labor market is not as healthy as traditional indicators would suggest.
Separately, the Fed agreed at its July meeting to use interest rates on excess reserves as its main tool to set the federal funds rate. Excess reserves refers to short-term assets that private banks keep inside the Fed. Banks are keeping an unusually high amount of reserves at the central bank.
The bank also plans to target a range instead of a precise number when it eventually raises rates, according to the minutes. For example, the bank now has a fed funds target of zero to 0.25%. In the past, the Fed would target a single number such as 3% or 4.5%.
As expected, the central bank gave no timetable on when it expects to start raising the fed funds rate. Most analysts believe the Fed will wait until mid-2015 or so.

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