The Federal Reserve's earlier-than-expected decision Dec. 12 to base changes in interest rates on the unemployment rate instead of a predetermined date was spurred by expectations of a moderate pace for economic expansion in 2013, according to minutes of the December Federal Open Market Committee meeting released Thursday.
Until December, committee members expected to keep the federal funds rate at zero to 0.25% at least through mid-2015. The new approach has the federal funds rate staying at those levels “at least as long as the unemployment rate remains above 6.5%,” and inflation remains no more than 50 basis points above the committee's 2% long range goal.
Chairman Ben Bernanke characterized the shift at a post-meeting news conference as a more “transparent process” that would let markets respond more quickly to changes in unemployment rates and other indicators.
Committee members also voted, with one dissenter, to continue in 2013 the monthly purchases of $45 billion in longer-term Treasury securities and $40 billion in mortgage-backed securities. “If the outlook for the labor market does not improve substantially, the committee will continue its purchases ... and employ other policy tools as appropriate,” according to the minutes.
Economic growth “continues to be restrained by several persistent headwinds,” including tight credit, consumer deleveraging, and political uncertainty over federal spending and taxes, according to the minutes.
The FOMC's next meeting is Jan. 29-30.