Policymakers of the Federal Reserve have cooled to the thought of explicitly raising the bar on future interest rate hikes.
The Fed remains intent to assure investors that easy monetary policy is here for the long haul. In the view of Federal Reserve, households and businesses require low borrowing costs to get spending and investment back on a self-sustaining path. This is the reason why the central bank took the unprecedented step of pledging to keep overnight interest rates near zero until unemployment falls to at least 6.5 percent, unless inflation threatens to rise above 2.5 percent.
Fed Chairman Ben Bernanke hinted the central bank could soon reduce its bond purchases. Recently, two highly publicized Fed research papers suggested that lowering the unemployment rate threshold could give the economy additional thrust.
“I think that the message that 6.5 (percent) is a threshold not a trigger and that rates will remain low even after that level is breached has sunk into market participants, so there is little benefit to changing the threshold,” said Tim Duy, an economics professor at the University of Oregon.
Even Evans, the original architect of threshold-based policy, said, “I would guess that that’s a very aggressive action and perhaps only a more intermediate step would be called for.”