Financial markets awaiting any Fed signal on rates
WASHINGTON (AP) — Financial markets are awaiting the end of a Federal Reserve meeting Wednesday to see whether the Fed sends any clearer signal about the timing of an interest rate increase.
The phrase that investors will be alert for is "considerable time." The presence or absence of those two words is viewed as key to the Fed's timetable for a change in its key short-term rate. The Fed has kept that rate at a record low since December 2008.
Since March, the Fed has said it expects to keep this rate near zero for a "considerable time" after it stops buying Treasurys and mortgage bonds. The 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 want 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, Chair Janet Yellen will be pressed when she meets with reporters later to clarify the Fed's intentions.
Investors will also parse updated economic forecasts that the Fed will release Wednesday for any further clues to a rate increase.
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.
Some economists think the Fed is not inclined to make major changes in its policy statement at the moment.
"All the trend lines for the economy look pretty good right now," said Mark Zandi, chief economist of Moody's Analytics. "I don't think the Fed wants to upset the apple cart."
Over the past several years, the Fed's ultra-low rates have helped the economy, cheered the stock market and shrunk mortgage rates. A rate increase could threaten to reverse those trends.
In August, U.S. employers added just 142,000 jobs, well below the 212,000 average of the previous 12 months. The slowdown was seen as likely temporary. But some analysts say it underscored that the economic outlook may remain too hazy for the Fed to signal an earlier-than-expected rate hike.
The Fed was reminded last year that markets are highly sensitive to signals about the end of a prolonged period of low rates. In June 2013, when Chairman Ben Bernanke suggested that the Fed might start slowing its bond purchases before year's end, the stock market plunged over two days. And bond rates headed up, slowing the housing recovery and jolting developing countries that had benefited from ultra-low U.S. rates.
"The adverse market reaction last year really did scare the Fed," said Diane Swonk, chief economist at Mesirow Financial. "For that reason, they are treading cautiously now."