The Federal Open Market Committee (FOMC) is the committee within the Federal Reserve Bank that makes the key decisions about interest rates and the money supply in the U.S. banking system. The Committee sets monetary policy by buying and selling U.S. Treasury securities (i.e. injecting and removing money from the banking system) and specifying the target federal funds interest rate, which is the interest rate commercial banks charge between themselves for overnight loans. The Committee is made up of 15 members and meets normally eight times a year in order to set ongoing monetary policy. The meeting minutes are released about three weeks after each meeting and are closely dissected by market participants for clues to future monetary and interest rate policy.

According to meeting minutes from the January meeting, Committee members discussed the possibility of interest rate increases in the near future for the first time in a long time! The current federal funds interest rate target at 0-0.25% is historically very low and has been in place since 2008.  The topic of conversation among the Committee members is top of mind now because of the recent decline in the unemployment rate which is approaching their 6.5% internal policy threshold for considering an increase to the federal funds interest rate. While unemployment is improving, the Committee’s other primary mandate, inflation, is still too low and argues against an increase in rates. The Committee is faced with a conundrum of what to do and how to communicate future monetary policy to the public.

The Fed’s current internal unemployment 6.5% threshold is based on the standard “U3” unemployment rate definition (percentage of labor force without jobs that have actively looked for work within the past four weeks); the Fed may move to focus on an alternative measure of labor slack such as the broader “U6” unemployment rate (now at 12.7% and includes “discourage workers”, “marginally attached workers” and “part-time workers who want full-time but cannot due to economic reasons”) as long as wage growth remains in check and not a threat to higher inflation.

Whatever the Fed ends up doing, the next recession does not appear to be in the foreseeable future. This may be a longer-than-average business cycle expansion, considering the high “U6” unemployment rate, low inflation, and a Fed supporting the business cycle instead of suppressing it. Aside from the 1930's and 1981, every business cycle downturn over the last century came after the output gap (difference between actual and potential GDP of the economy) went positive and unemployment fell to below average levels.

We are nowhere near those levels currently.