Speculation swirls over Fed language on rate hike

WASHINGTON – When the Federal Reserve issues a policy statement after it meets this week, the financial world will be on high alert for two words:

“Considerable time.”

The presence or absence of that phrase will trigger a rush to assess the likely timing of the Fed’s first increase in interest rates since it cut them to record lows in 2008.

The Fed’s recent statements have said it expects to keep its key short-term rate near zero for a “considerable time” after it stops buying Treasurys and mortgage bonds. Those bond purchases have been intended to keep long-term rates down to support the economy.

But the purchases are set to end in November, so the Fed may soon see the need to use some phrasing other than “considerable time” to signify when it might start raising rates. It could sub out that phrase in this week’s statement. Or it could wait until its next meeting in October.

Whatever the statement says when the Fed’s two-day meeting ends Wednesday, Chair Janet Yellen will be pressed when she meets with reporters later to clarify the Fed’s intentions.

Most economists think the Fed will raise rates starting around mid-2015. But as the U.S. economy has strengthened, speculation has intensified about whether it might do so sooner, perhaps by March.

With job growth solid, manufacturing and construction growing, and unemployment at a near-normal 6.1 percent, many analysts think the Fed is edging closer to a rate increase to prevent a rising economy from igniting inflation. If so, it might send such a signal by dropping “considerable time” and substituting other language to suggest a likely rate hike by early 2015.

On the other hand, the Fed could drop “considerable time” but substitute vaguer language suggesting it might wait longer to raise rates than many expect. Yellen has cautioned that the drop in unemployment may overstate the job market’s improvement. She has said the Fed also takes into account the number of people unemployed for more than six months; the number of part-timers who want full-time work; and average wages. Those measures remain less than healthy.

Those who think the Fed will modify the “considerable time” language this week point to recent comments from some officials. For example, Charles Plosser, president of the Fed’s Philadelphia regional bank, dissented at the last Fed meeting in July because he opposed the continued use of the “considerable time” phrase. He said it didn’t reflect progress the economy has made toward the Fed’s goals.

Plosser is among the Fed’s “hawks” – those who worry that super-low rates will stoke inflation or fuel asset bubbles.

With some hawks as well as doves expressing unease about the Fed’s use of “considerable time,” some analysts say the Fed could tweak the language this week even at the risk of jolting markets.