Patience a key for FOMC in rate-setting process
MADISON, Wis. (12/18/14)--A change in wording in the statement released by the Federal Open Market Committee (FOMC) Wednesday at the conclusion of its two-day policy meeting could mark a shift in forward guidance in terms of rate setting.
While the FOMC stopped short of taking out the words "considerable time" from its statement when referring to when it will begin to raise interest rates from their near-zero levels, the Fed also inserted the word "patient," which could signal that a rate hike isn't all that far off.
According to Moody's analysts, there is a precedent for this type of language in FOMC policy statements.
"The Fed has used this language in 2004," said Ryan Sweet, Moody's analyst (Economy.com Dec. 17). "If the Fed follows the same script, the first increase in the fed funds rate won't occur for a least six months."
Federal Reserve Chair Janet Yellen just about said as much in her post-meeting press conference Wednesday.
"At this point we think it unlikely that it will be appropriate that we will see conditions for at least the next couple of meetings that will make it appropriate for us to decide to begin normalization," Yellen said (MarketWatch Dec. 17).
A major obstacle that could be keeping pressure on the FOMC to take its time in this decision is the sluggish inflation that has dogged the U.S. economy. Inflation continues to crawl below the Fed's 2% target rate. The Fed largely pinned weak inflation on thinning energy prices.
While many may focus on the FOMC's use of "considerable time" and "patient" in the statement, meanwhile, Sweet believes another word should also receive attention.
"The Fed used 'transitory' to describe energy prices' impact on inflation," he said. "This is the norm for the Fed, but the central bank needs to be careful. Inflation has been too low for too long, and that has economic costs."
An appreciating dollar, which could put downward pressure on core goods prices, also could be affecting inflation, said Sweet, who added that this new development likely caught the eye of the FOMC as well.
"The Fed noted the mixed message on long-term inflation expectations, but given its assessment, policymakers appear to be putting more stock in survey-based rather than market-based measures," Sweet said.