The big question surrounding the FOMC’s statement tomorrow is whether the committee will keep or drop the words “considerable time.”
Since March, the Fed has promised that it intends to hold rates steady for a “considerable time” after it stops buying bonds, now on track to end in October.
Specifically, the Fed said: “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.”
There’s a bit of buzz that members of the committee are getting a touch hawkish, what with the asset buys winding down, the recovery continuing apace, the job market slowly tightening, and even Treasury yields creeping up a bit. That, some observers are suggesting, will lead them to drop the “considerable time” language, implying the interest rate liftoff will be coming sooner than later.
My guess–and I don’t give it much weight–is that they leave that language in. I know some committee members have hinted otherwise, but I doubt that most of them, especially their chair, see much in the way of price or wage pressures. Inflation expectations remain tethered, while output gaps in both GDP and jobs remain significant.
Moreover, it’s important for the Fed, not the chattering classes that scrutinize their entrails, to determine their forward guidance without heeding market pressures.
I can’t say what they will do, but I think what they should do is take this opportunity to remind markets that they’re data driven, the data are firming but still soft, and they don’t see a need for what would amount to a pretty hawkish signal.