The Federal Reserve says it will keep interest rates near zero until unemployment reaches 6.5%, but some economists say the central bank may have to consider changing its policy sooner than it thinks.
That's 30 months out. The unemployment rate now is 7.7%, so the Fed's target rate is 1.2 percentage points away. That's how much the rate has fallen in 14 months, from September 2011, when it was 9%.
If the unemployment rate takes 30 months to reach 6.5%, that would be more than twice as long as it's taken for the rate to fall by the same amount, points out Dean Maki, U.S. economist at Barclays.
If the Fed's economic forecast proves right, it will be because many of the 4 million-plus people who have left the labor force since 2007 begin looking for work again, says Maki.
If they don't find jobs right away, they would swell the ranks of the unemployed and raise the unemployment rate.
Maki doesn't see that happening. He has written that many or even most of those who have left the labor force are aging Baby Boomers who have actually retired and have left for good. If they stay retired, unemployment will reach 7.1% by late 2013 and could hit the Fed's target by early 2014, he says.
In the same camp is economist Joel Naroff, who predicts an improving economy will cut unemployment and force the Fed to end its efforts to lower interest rates through bond buying much sooner than people expect.
``If my forecast is correct, we should see the Fed's bond-purchase program end by the end of next year and rate hikes start sometime during the first half of 2014,'' Naroff says.
Economists have been debating what happened to the people who dropped out of the labor force for more than three years.
Last year, Maki and Naroff forecasted unemployment would fall below 8% by November, a much more optimistic — and accurate — outlook than the Fed's forecast last January that November joblessness would be between 8.1% and 8.9%.
Looking forward, other economists share the Fed's outlook.
IHS Global Insight chief U.S. economist Nigel Gault and Moody's Analytics chief economist Mark Zandi, say more workers will once again go back into the job market. Unemployment will drop more slowly, even though job growth will improve by late next year, as discouraged workers begin looking again, Zandi said.
Whether the Fed would change its interest rate policy if unemployment improves more rapidly is hard to predict.
The Fed didn't commit to raising rates if joblessness hits 6.5%, said Rick Rieder, chief investment officer for fundamental fixed income at BlackRock, the world's biggest asset management firm. It can keep interest rates low if it decides the job-market improvement is shallow, which it might if the rate gets to 6.5% without many workers heading back into the job market.
The central bank could also justify continuing its low rates policy, even if joblessness hits its target sooner than expected, if wage growth stays weak, Gault said.
"The Fed said (6.5%) is a necessary but not sufficient condition for tightening," Maki said.
But the bank's move away from telling markets it expects to keep rates extremely low for another two-plus years "gives them flexibility in either direction."



Ty Laffoon