The Federal Reserve's language lessons

Fri Dec 12, 2014 4:59pm EST
 
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By Rodrigo Campos

NEW YORK (Reuters) - "Will they or won't they?" is the question on investors' minds as the Federal Reserve policy-setting committee meets next week for the last time this year.

Markets have followed Fed speakers closely in recent weeks for clues on whether the U.S. central bank will change key language in its post-meeting statement regarding how long it will keep benchmark interest rates near zero.

Some expect the Fed to remove the reference to "considerable time" when setting a time frame for near-zero rates and maybe replace it, as it did ahead of the 2004-2005 monetary policy tightening cycle, with a nod to being "patient".

But that belief has been complicated somewhat by the slump in oil prices LCOc1 CLc1 that has pulled inflation expectations lower and caused the S&P stock index .SPX to post its first negative week in eight on Friday. The expectation of lower inflation could prevent the Fed from changing its current stance.

Client notes from Goldman Sachs, Citi and Bank of America/Merrill Lynch this week deal with expectations for the removal of the wording, roughly agreeing that however close the call is, it is more likely than not that the phrase will go away.

"They are going to remove it; I don’t think (Fed Chair Janet Yellen) is going to keep it in there just because of what we are seeing with the energy sector," said Sean McCarthy, regional chief investment officer for Wells Fargo Private Bank in Scottsdale, Arizona.

"All the other data has been strong, whether you are looking at construction, at the ISM numbers, and especially the jobs data that she cares about most."

Indeed, recent statements from Fed officials suggest the language could be changed. Goldman Sachs, in a note, pointed to "widespread use of the word 'patient'" as a signal that "some participants would prefer to revise the current language."   Continued...

 
The United States Federal Reserve Board building is shown behind security barriers in Washington October 28, 2014. REUTERS/Gary Cameron/Files