The Federal Reserve is expected to maintain its pledge to keep interest rates near zero for a “considerable time” as it is likely to take a slow and steady approach to its first rate rise in a decade.
Policymakers will meet next week, with some officials wanting to remove the rate guidance amid the country’s strengthening employment situation, Reuters reported.
But others feel it has to stay, and even when officials drop it, they will almost certainly tell financial markets that it will take a while before any rate hike is announced.
“I think ‘considerable time’ captures about as best you can with two words … the appropriate time for liftoff,” San Francisco Fed president John Williams told Market News International on Monday, adding that it’s still a “reasonable guess” the Fed will begin raising rates in mid-2015.
Atlanta Federal Reserve Bank president Dennis Lockhart agreed. “For my purposes I am not in a rush to drop it,” he said.
In October, the US central bank restated the pledge, but also added in its post-meeting statement that a rate hike would come sooner if the economic data was strong, and later if it wasn’t.
Once the phrase is dropped, a review of policy-setting history suggests the central bank will guide investors to an eventual rate hike through a series of incremental verbal steps to avoid roiling markets.
Replacing the reference to “considerable time” with a pledge to be “patient” on raising rates, for instance, could help markets get used to the idea of an eventual policy tightening.
That’s exactly what the Fed did the last time it was approaching a rate-hiking cycle in late 2003, Reuters said.
In December of that year, it signaled it was getting closer to tightening monetary policy by saying it no longer viewed a fall in inflation to be the main risk but rather viewed risks to inflation as balanced.
At the next meeting, it jettisoned its “considerable period” pledge and said it could be “patient” in removing stimulus, language it kept until May when it dumped patience and said rate hikes would likely be “measured”, At the next meeting in June, it raised rates by a quarter point.
With that history as a guide, dropping their current vow next week could suggest a move as early as April, the report said.
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