NEW YORK (TheStreet) -- While the market tanked on Federal Reserve Chairwoman's apparent error in specifying when the central bank will begin to raise rates, the key shift the policy-making arm delivered on Wednesday was to focus its efforts mainly on inflation.
Fed watchers know that the key function of the Federal Open Market Committee is to set short-term policy for the central bank, and its decision to drop a 6.5% unemployment rate as a threshold to consider raising the nation's federal funds rate shows that the committee is perplexed by inflation running below the target of 2%.
"Because the unemployment rate fell much fast than expected, they dropped that 6.5% target; however, inflation is staying much lower than they expected, so really she wants to shift focus back to this inflation undershoot," Ben Garber, economist at Moody's Analytics, said in an interview. "And even as the labor market continues to improve, they may keep rates especially low if inflation continues to underperform."
Yellen, who held her first press conference as chair of the Fed on Wednesday, uttered the word "inflation" 53 times, and repeatedly said inflation continues to run below the central bank's objective. While many wondered if dropping the unemployment threshold nullified the action of implementing it in the first place, Yellen pushed back. She said it had been effective, but that new circumstances triggered new market expectations. Thusly, they dropped the unemployment rate threshold.
Some economists don't think the shift to put more emphasis on lagging inflation is such a good idea.