Members of the Federal Reserve lowered their expectations for economic growth and raised their projections of the nation's unemployment rate, cautioning for the first time in recent memory that the low employment rate "over the next several years... would likely be below levels they consider to be consistent" with their mandate to maximize employment, according to meeting minutes released Wednesday.
The Fed is required by law to pursue policies that "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
A review of minutes of the Federal Open Market Committee meetings dating back to September 2008 -- the height of the financial crisis -- reveal no other meetings in which central bank policymakers expressed such a dim view of the unemployment rate. While the minutes have expressed such caution regarding the expected inflation rate, they have not indicated that the low level of employment would be so low as to threaten their legal mandate to pursue those policies that maximize employment.
"A number of participants expressed the view that, over the next several years, both employment and inflation would likely be below levels they consider to be consistent with their dual mandate, but they anticipated that, with appropriate monetary policy, both would rise over time to levels consistent with the Federal Reserve's objectives," the minutes read.
"This tells you that some of the people at the Fed think they're in a pretty challenging position," said Karen Dynan, a former top economist at the Fed's Board of Governors and the White House's Council of Economic Advisers who now serves as vice president and co-director of the economic studies program at the Brookings Institution, a Washington-based think tank.
Nearly 15 million workers are unemployed, according to the latest Labor Department figures. The unemployment rate stands at 9.5 percent. According to monthly data going back to 1948, the unemployment rate has been higher in only 23 months -- all of them in the periods of 1982-83 and the present period of 2009-10. Almost half of the unemployed, or 6.8 million Americans, have been out of work for more than six months, an all-time high. The Fed expressed "concern" over the long-term unemployed.
"The tools they have to work with have limited ability to get employment to where they want it to be -- or should be -- according to their mandate," Dynan explained. "We know that their traditional tool, the Federal Funds rate, has been close to zero since 2008, so there's no more room there," she said about the main interest rate.
Other tools at the Fed's disposal include more asset purchases (potentially increasing its balance sheet past its current level of $2.3 trillion) and changing the language it uses to communicate expected future interest rates, Dynan added. For example, the Fed could specify that it expects the main interest rate to be near zero for an even longer period than it's communicating now.
But market participants are concerned about the effectiveness of those measures, she said. For example, long-term interest rates have been low for some time, Dynan said. "Even if they could get it lower, how much impact could it have?" she asked.
So, the Fed is communicating to the market its awareness of its limits to boost employment while keeping inflation in check, the former top Fed economist said.
"There is a little more humbleness about the limitations of the tools they have right now," Dynan said.
That's not necessarily a bad thing, Dynan added, because it's "essential that they recognize their limits" in order to have market participants "believe that they know what they're doing and that they can use their tools effectively." It adds to the Fed's credibility, she said.
The Fed's admission was consistent with its subdued economic outlook, according to minutes from the June 22-23 meeting.
The Fed revised its expectations for GDP growth this year downward from a central range of 3.2-3.7 percent to instead 3.0-3.5 percent. The FOMC also revised upward its forecast for unemployment rates, increasing the central range from 9.1-9.5 percent to 9.2-9.5 percent. In fact, whereas at least one top Fed official thought in April that unemployment this year would dip down to 8.6 percent, in June the lowest forecast unemployment rate jumped to 9.0 percent. The highest forecast also increased from 9.7 to 9.9 percent from the April to June meetings.
Overall, the Fed said that it sees a "continued, moderate recovery" and that the labor market is "improving gradually," minutes from the June meeting show.
Referencing the recent financial turmoil in Europe, which in part caused the policymakers to dampen their growth expectations, the minutes state that "about one-half of the participants judged the balance of risks to growth as having moved to the downside."
In other words, half of the Fed thinks the economy could get worse.