Fed could be about to make a major policy change

Posted by CNBC

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Unemployment will have to drop a good deal further before the Federal Reserve begins to raise interest rates, if the central bank follows recommendations from its own economists.

Separate papers that will be presented formally this week at an International Monetary Fund meeting suggest that the U.S. central bank should lower its target for the jobless rate before it hikes rates. (The two papers can be found here, by William English, David Lopez-Salido and Robert Tetlow, and here, by David Reifschneider, William Wascher and David Wilcox.)

Under current Fed thinking, the unemployment rate would have to drop to just 6.5 percent—with the inflation rate rising to 2.5 percent—before making changes in the present structure, which has the policy target rate near zero.

But the research from a half-dozen Fed economists maintains the unemployment objective actually should be lowered to 6.0 percent or even 5.5 percent before it makes any moves.

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