JACKSON HOLE, Wyoming (Reuters) - The U.S. Federal Reserve should commit to tightening policy when the unemployment rate falls to a 6.5-percent “trigger” level, a top U.S. central bank official said on Friday.
The proposal by Philadelphia Fed President Charles Plosser appears to run against the grain of most other U.S. monetary policy-makers, who have increasingly stressed that interest rates could well stay near zero well after the U.S. jobless rate hits that level.
The Fed has held its key federal funds rate at rock bottom since late 2008 to help boost hiring and drag the economy from the Great Recession. Unemployment was 7.6 percent last month.
To clarify its future intentions and to give the economy even more support, the policy-making Federal Open Market Committee said in December the Fed would keep rates that low until unemployment falls to 6.5 percent, as long as inflation expectations do not rise above 2.5 percent.
Plosser, a hawkish Fed official who regains a vote on policy next year, said these so-called “thresholds,” while an improvement, still leave too much room for interpretation. The Fed should “commit to its forward guidance” by treating those levels as “triggers rather than thresholds,” he said.
The “FOMC has offered a variety of changing targets or signals about future behavior,” he said in prepared remarks to the 5th Annual Rocky Mountain Economic Summit here.
“Although the aim was to clarify our policy intentions, I believe the repeated changes have likely caused more confusion than illumination,” he told the conference hosted by the Global Interdependence Center.
The proposal may be a long shot, since influential officials have recently stressed the Fed is in no rush to raise rates.
On Wednesday, Fed Chairman Ben Bernanke renewed his message that the U.S. central bank’s policy would remain “highly accommodative” and rates could well stay low even after the jobless rate falls below the threshold. “There will not be an automatic increase in interest rates when unemployment hits 6.5 percent,” he said.
Turning to the Fed’s other accommodation effort, Plosser repeated the time has come to reduce then end by the end of 2013 the bond-buying program known as quantitative easing, or QE.
“It is time to exit from the asset purchase program in a gradual and predictable manner,” he said.
Reporting by Jonathan Spicer; Editing by Chizu Nomiyama