US Links Interest Rate Policy To Job Growth

US FED will link interest rate policy to the job growth and the tendency is to carry on repressing interest rates in the event that the unemployment rate in the USA hover higher than 6.5%.

It is the newest policy by the FED to counter the below par economic recuperation from the last recession caused by the financial crisis. Interest rates are expected to hover around 0% till the unemployment rate has improved above the set benchmark provided the inflation stay at or below 2.5%.

The FED has also initiated QE4 to replace Operation Twist to buy US$45 billion Long Term Treasuries per month and credit the relevant banks that sold the bonds with fresh reserves thus printing new money in this manner. This is on top of the US$40 billion per month purchase of mortgage-backed securities that the FED initiated in Sep 2012.

As the Fed are more explicit and transparent, it give the the financial markets with more clarity about its monetary policy action in the future.

This new policy is considered unorthodox as it is moving away from its previous main mandate to fight inflation by the central bank.

In Nov 2012, the unemployment rate was at 7.7% while the inflation rate was below 2%.

The FED gave an optimistic view for the 2013 economy to expand by 2.3 to 3% on the assumption that the US Congress will resolve the Fiscal Cliff by early 2013.

29 Dec 2012