Monday, January 24, 2011

Regarding the FOMC: How long is an "Extended Period"?

by Bill McBride on 1/24/2011 03:33:00 PM

This is an update to a post I wrote in April 2010. Once again people are asking if the Fed will raise rates this year? It is unlikely.

That reminds me of a question Catherine Rampell at the NY Times Economix asked: How Long Is an ‘Extended Period’?

My short answer: Longer than many analysts expect.

We can compare to the "considerable period" language in 2003:

• June 25, 2003: Lowered Rate to 1%, Unemployment Rate peaked at 6.3%

• August 12, 2003: “the Committee believes that policy accommodation can be maintained for a considerable period.” Unemployment rate at 6.1%

• December 9, 2003: Last statement using the phrase "considerable period". Unemployment rate at 5.7%

• January 28, 2004: the Committee believes that it can be patient in removing its policy accommodation. Unemployment Rate 5.7%

• May 4, 2004: “the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.” Unemployment Rate 5.6%

• June 30, 2004: FOMC raised the Fed Funds rate 25 bps. Unemployment Rate 5.6%
So "extended period" is probably 6+ months after the language changes. The FOMC will meet this week, and there has been no hint that the "extended period" language will change. The next meeting will be on March 15th and the next two day meeting is near the end of April.

Based on past experience - as I noted last year - it is unlikely the Fed will raise rates until the unemployment rate is below 8%, and therefore I think it is very unlikely the Fed will raise rates this year.