Fed signals rate guidance likely to stay for now

Mon Dec 8, 2014 4:45pm EST
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By Michael Flaherty and Ann Saphir

(Reuters) - The Federal Reserve's vow to keep interest rates near zero for a "considerable time" is likely to remain in place for now, with the U.S. central bank set to take a slow and steady approach to its first rate rise in a decade.The pledge will be up for debate again when policymakers meet next week, with a strong jobs report bolstering the case of officials who want to remove it.

But others feel it still has some shelf life, and even when officials drop it, they will almost certainly insert a placeholder to assure financial markets any rate hike is still a ways off.

"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, like Williams a policy centrist, agreed. "For my purposes I am not in a rush to drop it," he said after a speech in Atlanta on Monday.

In October, the Fed 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.

JPMorgan economist Michael Feroli said in a research note last month that it made sense for the Fed to keep the phrase "now that it has been 'neutered' by the addition of the sentence that indicates faster progress would bring earlier rate hikes, and slower progress would bring later rate hikes."

Some economists, however, see a strong case for the phrase to be dropped next week. Jan Hatzius of Goldman Sachs has said it would be "awkward" to wait until the Fed's next meeting in January because Fed Chair Janet Yellen is not currently scheduled to hold a news conference then. She is set to speak with reporters next week.

Once the language 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.   Continued...

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst