Fed's rate guidance on chopping block, new exit plan nears

Thu Sep 11, 2014 1:02am EDT
 
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By Ann Saphir and Michael Flaherty

(Reuters) - The U.S. Federal Reserve is facing perhaps its most pivotal meeting of the year next week, as it debates a potential overhaul of its guidance on interest rates and seeks to nail down a plan for exiting its extraordinarily easy monetary policy.

It remains to be seen whether decisions will be taken on either, but it is clear that details on a so-called exit plan are nearly complete, while discomfort is growing internally over a pledge to keep rates near zero for a "considerable time."

Investors will parse the central bank's words closely for any clues on the timing of the first U.S. rate hike in more than eight years. Any major tweaks to its policy statement could cause ructions in financial markets as investors recalibrate bets on benchmark rates in the world's biggest economy.

A strong run of U.S. economic data has led Fed Chair Janet Yellen and other top officials to acknowledge the possibility they may need to raise rates sooner than they thought just a few months ago, although a surprisingly soft reading on jobs growth in August could provide some breathing room.

"The discussion itself is a testament to the underlying shift in monetary policy," said TD Securities analyst Gennadiy Goldberg. He said ditching the "considerable time" phrase would open the door to a rate hike as soon as March, several months earlier than most investors currently expect.

The Fed has kept overnight rates near zero since December 2008 and has more than quadrupled its balance sheet through a series of bond-buying programs designed to push down borrowing costs and boost investment and hiring.

Fed policymakers have said they do not expect to raise rates until 2015, and their meeting next Tuesday and Wednesday looks certain to end with no change in policy beyond a well-telegraphed reduction in the central bank's asset purchases.

But officials will release fresh economic and interest-rate projections, extending their forecast horizon through 2017. Those, coupled with even minute changes in the Fed's post-meeting statement, could reshape expectations for how soon and how fast the central bank is likely to raise rates.   Continued...

 
The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst/Files