With Economy Softer, Yellen's Fed Doesn't Tap the Brakes

NEW YORK (TheStreet) -- Janet Yellen replaced one question with another. If people were asking before what the Federal Reserve would do to interest rates once the unemployment rate went below 6.5%, surely they are now scratching their heads over what the central bank's target of "maximum employment" really means.

"In determining how long to maintain the current 0 to 1/4% target range for the federal funds rate, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2% inflation,'' the Fed said in the first post-meeting statement of the Federal Open Market Committee since Yellen became its chair in January.  

And with that, the central bank's 6.5% unemployment target officially bit the dust, replaced by a standard that raises at least as many questions. 

In a press conference, Yellen put some meat on the bone, but the picture was more or less what Fed watchers have been piecing together on their own.

She emphasized measures like the high level of involuntary part-time employment among workers who can't find full-time work, the dropping level of labor force participation (though she, like her predecessor Ben Bernanke, said the dip mostly represents a wave of Baby Boomers retiring) and the difference between the short-term unemployment rate and the still-unusually high rate of people unemployed for longer than six months.

For now, the change in language about what could change the Fed's policy leads to little change in the policy itself. The Fed is still going to leave rates that it controls near zero for at least another year, while reducing its purchases of Treasuries and mortgage bonds that have been keeping market interest rates low.

Thirteen of the 16 FOMC participants at this meeting think the central bank will first raise the fed funds target rate in 2015 -- nearly unchanged from the 12 Fed governors and regional Federal Reserve Bank presidents who thought so in December, the last time the Fed released the data. 

If anything, the Fed actually sent a signal that it's backing off increases a little. In December, two members thought this year was the time to begin raising rates -- and now there is only one member giving that answer.

In one of the notable moments of the press conference, Yellen gently rebuked the Wall Street Journal's Jon Hilsenrath for making too much of the Fed's small shift in inclination to tighten by 2016.

"I don't think it's appropriate to read too much into it,'' Yellen said.

The policy shows almost no short-term impact from the growth hiccup this winter, which led the Fed's governors and bank presidents to trim their forecasts for growth.

The Fed says the economy will grow 2.8% to 3% this year -- about in line with private forecasts, and below a range of 2.8% to 3.2% the governors predicted in December 2013. Unemployment will fall to 6.1% to 6.3%, versus a December 2013 projection of 6.3% to 6.6%.

Given the slowdown, it's probably smart not to make major changes. And that's consistent with the smart, stable image Yellen has projected for years -- as well as with her entirely correct assessment that consumer balance sheets, tight credit and sluggish wage growth means it's too soon for the Fed to take away the punchbowl. 

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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