The thinking behind the Fed’s next move
Some are expecting a signal that interest rates will go up soon.
Next week, Federal Reserve policymakers hold their last meeting of the calendar year, and many economists expect they may do something major.
Really major.
They may remove the two-word phrase, “considerable time,” from the guidance they issue – the tea leaves economists and investors try to read to figure out what the policymakers are thinking.
Former Fed Chair Ben Bernanke first used the phrase “considerable time” in September 2012: “The committee emphasized that it expects a highly accommodative stance of monetary policy to remain appropriate for a considerable time after the economic recovery strengthens,” the language read that day, and in the 17 Fed statements since.
Two words may not sound important, but according to Dana Saporta, an economist with Credit Suisse, that first mention was a turning point. “It was a time in which the Fed was moving away from calendar-based forward guidance” – that is, tying policy changes to certain dates– “to thresholds”—that is, tying policy changes to inflation or unemployment.
Throughout the economic recovery, the Fed has been trying to telegraph something, says Guy Berger, U.S. economist at RBS Securities: “Our policy is dictated by how the economy is evolving.” And maybe, now that Fed has wrapped up its multi-trillion-dollar bond-buying program, the economy has evolved enough for it to signal to investors higher rates are coming soon.
Why?
Well, take last week’s employment report. In November, the U.S. economy added 321,000 new jobs, and wages ticked up 0.4 percent. “When they look at domestic economic indicators, almost all of them have improved,” says Mark Vitner, a senior economist at Wells Fargo. But, he notes, there is a lot more on the Fed’s radar.
“The plunge in oil prices has caught a lot of folks by surprise,” Vitner points out. “Right now the rest of the world is a bit of a drag on the U.S. economy, and it presents some downside risk.”
He says Fed policymakers are keeping an eye on the economies of China and Germany, both of which have slowed down, and that could affect the economy here in the future.