Hilsenrath: The case for the Fed to tweak but keep "considerable time" for now..

WSJ Analysis: The Case for the Fed to Tweak but Keep "Considerable Time" For Now

In a webcast Tuesday, I explained why I thought the Federal Reserve would stick with, but qualify, an important phrase in its policy statement Wednesday which assures near-zero interest rates for a "considerable time." This was simply my best analysis of where I think the Fed is going based on what we have been reporting and what officials have said in the past.

Here is what we know and have reported:

• A growing number of Fed officials want to alter an assurance that they expect to keep short-term rates near zero for a "considerable time" after a bond-purchase program ends in October. They want to be seen as making their decisions based on the economy's performance and not the calendar. "Considerable time" appears to bind them to the calendar. Moreover, with the bond program ending next month, they can no longer attach "considerable time" to the program, added impetus to rethink the guidance. That's why, as we've reported, this phrasing is going to get significant discussion at this week's policy meeting.

• There didn't appear to be a consensus before the meeting about when to change this language. As we reported, in an interview with the Wall Street Journal, Boston Fed President Eric Rosengren suggested he thought October would be an appropriate time to shift the language. "Presumably if the economy unfolds as we expect, we still stop the bond-purchase program in October," he said. "That will give us an opportunity to rethink how the statement should read. At that point I think we should be emphasizing less forward guidance and more focus on how the incoming data is coming in." Dennis Lockhart, president of the Atlanta Fed, told my colleague Pedro Nicolaci da Costa in Jackson Hole, Wyo., "I don't think we need to be too fast to change that guidance."

• The Fed wants to be data dependent. The economic data since its last policy meeting show the pace of improvement in the labor market has slowed and inflation remains below its 2% objective. The jobless rate, for instance, was 6.1% in August and 6.1% in June, which was the recording they had in hand when they last met in July. Spending and investment data suggest the Fed's forecast of a growth rate near 3% in the second half of the year is on track. Against a similar backdrop in July the Fed judged there was significant slack in the economy and that rates would stay low for a considerable time after the bond program ended.

• Since June Fed Chairwoman Janet Yellen has been qualifying her assessment of considerable time to warn the public that rate increases could come sooner than planned if the labor market and inflation improved more quickly than expected, as they did in the first half of the year. Here is what she said in Jackson Hole last month. It is a mouthful, but fully describes her thinking as of late August:

"At the FOMC's most recent meeting, the Committee judged, based on a range of labor market indicators, that "labor market conditions improved." Indeed, as I noted earlier, they have improved more rapidly than the Committee had anticipated. Nevertheless, the Committee judged that underutilization of labor resources still remains significant. Given this assessment and the Committee's expectation that inflation will gradually move up toward its longer-run objective, the Committee reaffirmed its view "that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after our current asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored." But if progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter. Of course, if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate."

• The Fed has other business on its plate Tuesday and Wednesday. Officials are trying to finalize an "exit plan" that would establish the mechanics for how the central bank will manage interest rate increases when the time comes. (Important components of the exit plan were laid out in minutes from their last meeting.) They are also preparing to end their bond-buying program in October.

Here's my analysis: Janet Yellen is a methodical individual and the Fed, in normal times, is a slow-moving institution. It takes time for debates to play out. Ms. Yellen is seeking consensus, as we reported earlier this week. The considerable time debate doesn't feel ripened or fully aired. When Ms. Yellen has used the phrase in recent months she has qualified it, but not suggested changing it. Meantime the Fed has other business on its plate. The exit plan has been in the works for months, as has the plan to end bond buying. Changing the "considerable time" guidance now, while also announcing an exit plan, could be viewed by market participants as a surprising move toward raising rates.

Fed officials haven't forgotten last year's "taper tantrum," when long-term interest rates shot up as they commenced discussions about winding down the bond program.

We reported earlier this week that Ms. Yellen, as Fed chairwoman, hasn't behaved as the easy-money policy "dove" that many market participants expected. That doesn't mean she's suddenly a hawk. It just means she's not a dove.

Ms. Yellen's most logical next step, to my mind, would be to stick for the time being to what she's been saying, which is that rates will stay low for a "considerable time" with the strong qualification that this could change if the job market keeps improving quickly. Staying on message this month could entail signaling an end to the bond program and a more formal exit strategy. The Fed would then have time to air out a change in the "considerable time" formulation for a later date, giving Ms. Yellen time to get all of her colleagues on board.

Will the Fed take these steps? Only the people in the room know that. The rest of us will see Wednesday afternoon.

 

Related coverage:

What to Expect From the Federal Reserve Decision: WSJ's Hilsenrath and Reddy Discuss

Hilsenrath: How the Federal Reserve Could Tweak 'Considerable Time'

5 Things to Watch at This Week's Fed Meeting

Fed Chief Yellen Seeks Interest-Rate Consensus

How Does Janet Yellen Spend Her Time? Check Her Calendar

The Outlook: Fed Sizes Up Alternate Rate-Hike Paths

Fedspeak Cheatsheet: What Are Fed Policy Makers Saying?

 

 

 

 

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