More than 2 million unemployed Americans are at risk of losing their jobless benefits over the next three months. That threatens to undermine the unemployment rate as an anchor for future Federal Reserve action.

For the past year, central bank officials have said their benchmark interest rate will remain near zero as long as the unemployment rate is at least 6.5 percent. Calculations by Michael Feroli, JPMorgan Chase & Co.’s chief U.S. economist in New York, indicate that mark could be reached within months.

Federal funding for emergency unemployment insurance payments, which has been part of stimulus packages since the financial crisis in mid-2008, may expire at the end of the year after being left out of a bipartisan budget deal making its way through Congress. The number of discouraged, long-term unemployed workers leaving the labor force will probably climb as a result, according to Feroli, pushing down joblessness.

The central bank’s jobless rate threshold will be “a diminished communication tool,” said Feroli, a former economist at the Fed in Washington. “It increases the importance of their ability to convey this message that 6.5 percent is not a trigger, it’s only a point at which they’ll begin considering rate hikes.”

The Fed for the first time linked the outlook for its main interest rate to numerical thresholds for unemployment and prices in December 2012, saying rates would stay low “at least as long” as joblessness remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.

Moving target

At that time, decision makers on the Federal Open Market Committee projected the unemployment rate would reach 6.5 percent no sooner than the fourth quarter of 2015. As of the most recent projections in September, most saw the threshold being met by the end of 2014. The FOMC next meets on Dec. 17-18 and will issue new forecasts for growth and unemployment after the meeting.

The 6.5 percent threshold will probably be met even sooner. At the end of this year, the 1.3 million long-term unemployed now receiving emergency benefits will probably lose aid. Another 850,000 workers will exhaust their regular state unemployment payments in the first quarter of 2014, and will no longer have access to additional payments, according to a report from the National Employment Law Project.

Jobless rate

A shrinking labor force combined with an increase in employment as workers who no longer receive benefits take whatever jobs are available will shave as much as 0.5 percentage point from the jobless rate, according to Feroli. Labor Department figures last week showed unemployment unexpectedly declined to a five-year low of 7 percent in November.

The drop means the central bank has already blown past one marker. In June, Fed Chairman Ben S. Bernanke said policy makers could begin dialing back on $85 billion-a-month in bond purchases this year and the program would probably end in mid- 2014, when he projected the jobless rate would be around 7 percent. He added that low interest rates are “likely to remain appropriate for a considerable period after asset purchases are concluded.”

Out-of-work Americans are more likely to drop out of the labor force if the benefits expire, accounting for most of the projected decline in the unemployment rate, according to Feroli. People responding to the government’s survey of households have to say they are in the labor force and actively looking for work in order to be considered unemployed.

Participation rate

The U.S. labor force participation rate, or the share of the working age population in the workforce, was at 63 percent last month and could fall as much as 0.3 percentage point within a few months of the benefits’ expiration, Feroli said, putting it at the lowest level since 1978.

Such an outcome could make it “very messy” for the Fed to communicate its intentions as policy makers are still debating when to start dialing back bond purchases, throwing financial markets for a loop, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. The central bank will need to more explicitly define which indicators and scenarios officials are using to gauge improvement in the world’s biggest economy, he said.

“If you’re going to give rules and then figure out every caveat why they don’t hold, then it’s not really a rules-based policy,” said LaVorgna, who is based in New York. By having thresholds that lack action when they’re approached or breached, “it just adds to the confusion.” LaVorgna estimates the loss of emergency benefits will reduce unemployment by 0.2 percentage point to 0.3 percentage point.

North Carolina

North Carolina has already borne out these predictions. Effective June 30, the state enacted legislation that reduced the average weekly amount of regular benefits, violating a federal rule and costing its residents access to emergency benefits.

The maximum duration of unemployment insurance for a North Carolina resident is now 20 weeks, and will drop to 19 weeks in January, according to Larry Parker, a spokesman for the N.C. Department of Commerce and Division of Employment Security. Illinois and Nevada residents have the longest-running benefits at 73 weeks.

North Carolina’s unemployment rate in October was down 0.9 percentage point from July, the biggest three-month decline since 1983. At 61.4 percent, the labor-force participation rate was at a record low.

“Unemployment insurance has an anchoring effect,” John Quinterno, founder of South by North Strategies, Ltd., an economic research group in Chapel Hill, North Carolina, said in an interview. “It helps keep unemployed people connected to the labor force because you have to be searching for work to continue to qualify for compensation.”

Transparency efforts

Under Bernanke, the Fed has sought to improve transparency in its monetary policy, with the chairman calling it one of his “top priorities” as he released more information on deliberations and gave regular press conferences after policy decisions.

A slump in national unemployment caused by a shrinking labor force as discouraged workers throw up their hands and Baby Boomers retire would represent a communications challenge to Janet Yellen, who has been nominated to lead the central bank when Bernanke’s term ends on Jan. 31. Yellen has led a Fed subcommittee on communications.

For that reason, economists at Goldman Sachs Group Inc. in New York, led by Jan Hatzius, say policy makers will ultimately change the threshold. Hatzius projects the jobless rate will reach 6.5 percent by mid-2014, propelled in part by the end of emergency benefits.

Fed minutes

Minutes of the Fed’s October meeting showed just a couple of participants favored lowering the threshold, while others were concerned such action would raise questions about the central bank’s commitment.

“We still believe that Fed officials will eventually decide that conditions have changed sufficiently since late 2012 to lower the threshold,” Hatzius wrote in research note yesterday. “We do not see how this would undermine the credibility of the threshold. On the contrary, it would seem like a good example of cautious and deliberate central banking.”

Drew Matus, deputy U.S. chief economist at UBS Securities LLC in Stamford, Connecticut, says policy makers may be averse to risking their reputation even as the data will show the workforce continues to contract, he said.

“They’ve been unwilling to consider the fact that maybe people are just leaving the labor force and not going to return,” Matus said. Still, “once the facts present themselves in a different way, you should probably change your mind.”