WASHINGTON Nov 5 Two of the Federal Reserve's
top staff economists make the case in new research papers for
more aggressive action by the U.S. central bank to drive down
unemployment by promising to hold interest rates lower for
The papers provide valuable insight into the central bank's
thinking at a time when Fed Vice Chair Janet Yellen is
maintaining strict silence ahead of a Senate hearing on her
nomination to succeed Chairman Ben Bernanke in January.
The studies were authored by teams led by William English,
head of the Fed's monetary affairs division, and David Wilcox,
the central bank's director of research and statistics. They
will be presented at an International Monetary Fund conference
in Washington on Thursday and Friday, respectively.
The Fed has kept interest rates near zero since late 2008
and has vowed to hold them there at least until the unemployment
rate hits 6.5 percent, provided the outlook for inflation does
not rise above 2.5 percent. The U.S. jobless rate was 7.2
percent in September.
"The studies suggest that some of the most senior Fed
staffers see strong arguments for a significantly greater amount
of monetary stimulus," Goldman Sachs Chief Economist Jan Hatzius
wrote in a research note to clients. His takeaway was that the
Fed would likely lower the unemployment threshold to 6.0 percent
at its March meeting.
The paper co-authored by English studied what would happen
if the Fed strengthened this so-called forward guidance.
It found that economic benefits were higher when the
unemployment threshold was 6.0 percent, compared to 6.5 percent,
and higher still if it was 5.5 percent compared to 6.0 percent.
It did not find much evidence to support altering the inflation
threshold, as some have advocated.
The paper co-authored by Wilcox examined evidence that the
costs of high unemployment on the productive capacity of the
U.S. economy were much larger than thought, strengthening the
argument to allow inflation to overshoot the Fed's 2 percent
target to bring the level of joblessness down faster.
Both papers discussed a so-called optimal policy path,
echoing the findings Yellen herself laid out in a speech last
year that urged policy forbearance if inflation temporarily
overshot the Fed's price stability objective.
Yellen can expect to be quizzed about this view at a Senate
Banking Committee hearing that is likely to be held on Nov. 14.
Other economists were not so sure the Fed will lower its
unemployment threshold, since the English paper also discussed
the costs to the central bank's long-term credibility of
changing the thresholds.
But they agreed that neither paper advocated heavily for the
Fed's bond-buying program, which has quadrupled the size of the
central bank's balance sheet to $3.8 trillion in an effort to
hold down long-term borrowing costs.
Officials have already said they would like to start scaling
the program back, but stunned markets in September when they
opted to keep buying bonds at an $85 billion monthly pace. They
maintained that stance at a meeting last week.
The emphasis on the benefits of stronger forward guidance in
the paper by English and his two colleagues, however, suggested
that officials may at least opt to give more clues about how
they would respond as the U.S. jobless rate nears their current
6.5 percent threshold.
This could be done when Fed policymakers decide to begin
reducing bond purchases to help offset any adverse market
reaction by showing a commitment to keep interest rates low.
Bernanke, whose term expires at the end of January, told
reporters in September that there were a number of ways in which
the forward guidance could be strengthened.
"We could provide more information about what happens after
we get to 6.5 percent and those sorts of things, and to the
extent that we could provide precise guidance, I think that
would be desirable," he said.