Fed cites unemployment in keeping interest rate low

WASHINGTON — The Federal Reserve made it plain Wednesday that job creation had become its primary focus, announcing that it planned to continue suppressing interest rates as long as the unemployment rate remained above 6.5 percent.

It was the first time the nation’s central bank had publicized such a specific economic objective, underscoring the depth of its concern about the persistence of what Fed chairman Ben S. Bernanke, called ‘‘a waste of human and economic potential.’’

To help reduce unemployment, the Fed said it would also continue monthly purchases of $85 billion in Treasury securities and mortgage-backed securities until job market conditions improved, extending a policy announced in September.


But the Fed released new economic projections showing that most of its senior officials did not expect to reach the goal of 6.5 percent unemployment until the end of 2015, raising questions of why it was not moving to expand its economic stimulus campaign.

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At a news conference, Bernanke suggested that the Fed was approaching the limits of its ability to help the unemployed.

‘‘If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously we would do that,’’ he said when asked if the Fed could do more. ‘‘But there are constraints in terms of the dynamics of the economy, in terms of the power of these tools, and in terms that we do need to take into account other costs and risks that might be associated with a large expansion of our balance sheet,’’ referring to the monthly purchases of securities.

In focusing on job creation, the Fed is breaking with its long history of treating the inflation rate as the primary focus of a central bank. But the Fed is charged by Congress with both controlling inflation and minimizing unemployment. And over the last year, a group of officials led by Charles L. Evans, president of the Federal Reserve Bank of Chicago, convinced their colleagues that the Fed was falling short on the unemployment front.

The unemployment rate in November was 7.7 percent — it has not been below 6.5 percent since September 2008 — and inflation is below the 2 percent annual rate that the Fed considers healthiest.


“Imagine that inflation was running at 5 percent against our inflation objective of 2 percent,’’ Evans said in a September 2011 speech first describing the proposal. ‘‘Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.’’

That argument was easier to win because inflation is under control, and the Fed expects the pace of price increases to remain at or below 2 percent through 2015. But in perhaps the clearest indication of the Fed’s philosophical shift, the Federal Open Market Committee said Wednesday that it would not relent in its focus on unemployment unless the medium-term outlook for inflation rose above 2.5 percent.

The change was supported by 11 of the committee’s 12 members. The only dissent came from Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, who has repeatedly called for the Fed to do less. He believes that the policies are ineffective and could inhibit the central bank’s ability to control inflation.