November 20, 2012 / 6:16 PM / 5 years ago

Bernanke signals support for Fed policy "thresholds"

NEW YORK (Reuters) - Federal Reserve Chairman Ben Bernanke voiced support on Tuesday for numerical unemployment and inflation thresholds, in a signal that he backs adopting them to help guide expectations about when the Fed will start raising interest rates.

“This is something we are looking at very carefully,” Bernanke told the New York Economic Club after delivering a speech. “It does have the advantage that it would help to distinguish between our anticipation for how the economy is going to evolve, and how we will react to those conditions.”

Bernanke’s tacit endorsement of thresholds follows strongly voiced support last week from Fed Vice Chair Janet Yellen. Together they provide a powerful hint that the U.S. central bank is seriously thinking about moving in this direction.

Such a step would allow it to get away from a current commitment to hold rates down until a specific calendar date, which a number of policymakers view as problematic.

The U.S. central bank has said it expects to keep overnight rates near zero until at least mid-2015 and that policy will remain highly accommodative for a considerable time after the economic recovery strengthens.

Bernanke explained that this date-tied commitment mixes up two important factors impacting consumer and business behavior: how long the Fed might think the economy will need “life support” and how it will respond to economic conditions.

The chairman stressed that the issue remained under discussion and that he did not want to “front-run” a decision by his colleagues on the Fed’s policy-setting committee.

But Bernanke also called thresholds a “very promising direction” in which to take central bank communication and emphasized that it was being actively studied.

“It would have another advantage, which is that as economic conditions vary as news comes in ... that would automatically lead markets to adjust rates appropriately. So there are some definite advantages.”

Chicago Fed chief Charles Evans has suggested holding rates near zero until unemployment gets under 7 percent, provided that inflation stays under 3 percent. His colleague Narayana Kocherlakota at the Minneapolis Fed has called for thresholds of 5.5 percent unemployment and 2.25 percent inflation.

Writing by Alister Bull; Editing by Andrea Ricci

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