July 6, 2015 / 6:21 PM / 3 years ago

Lower 'natural' U.S. jobless rate allows later rate hikes: Fed paper

SAN FRANCISCO, July 6 (Reuters) - The more the “natural” rate of U.S. employment falls, the longer monetary policy makers may be able to keep interest rates low, according to research published Monday by the San Francisco Federal Reserve Bank.

Federal Reserve policymakers have slashed their estimates of the longer-run rate of unemployment that translates to a fully employed economy to about 5.1 percent in June from about 5.6 percent in 2012. They have also cut their estimates of the level of short-term borrowing costs, minus 2 percent inflation, which is consistent with a fully normal economy, to about 1.63 percent from about 2.25 percent.

While both declines suggest a lower policy rate than otherwise, the drop in the estimate of the “natural” unemployment rate is likely to have a bigger impact on policymaking, according to the new research.

“A simple monetary policy rule shows that, compared with earlier projections of these rates, declines in the natural rate of unemployment could translate into a longer period of accommodative monetary policy and declines in the equilibrium real interest rate could translate into a lower average policy rate in the long run,” San Francisco Fed economists Mary Daly, Fernanda Nechio and Benjamin Pyle wrote in the regional Fed bank’s latest Economic Letter.

“Over time, the adjustments to the natural rate of unemployment have contributed more to the decline in the policy prescription,” they added

San Francisco Fed President John Williams has said he believes it will likely be appropriate for the U.S. central bank, which has kept its short-term interest rate near zero since December 2008, to raise the rate two times before the end of the year, when in his view the economy will likely be at full employment.

About half of Federal Reserve policymakers share that view, but the other half prefer a less aggressive approach to raising interest rates. (Reporting by Ann Saphir; Editing by Alan Crosby)

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