Fed considers time to end free money pledge

Sun Dec 14, 2014 4:44am EST
 
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By Philip Blenkinsop

BRUSSELS (Reuters) - The U.S. Federal Reserve would give the clearest signal next week that its easy money stance is ending if, as some expect, it drops its two-year long pledge to keep interest rates close to zero for a "considerable time".

The Fed, which meets on Tuesday and Wednesday, first inserted that wording in its post-meeting statements in December 2012, promising then to maintain its highly accommodative monetary stance for a considerable time after its asset purchase program ends and the economic recovery strengthens.

Both have occurred.

The U.S. unemployment rate slipped below 6.5 percent, a Fed mark of healthier recovery, in April and is now at a six-year low of 5.8 percent even as more people enter the labor force. Its asset buying ended in October, when all but one of its voting members opted to keep the "considerable time" language.

The market has understood the term to mean at least six months, with current expectations for a first rate hike in mid-2015.

Since October, the more hawkish Dallas Fed chief Richard Fisher has said the Fed should drop the pledge, while more moderate Cleveland counterpart Loretta Mester told Reuters the reference was "really stale".

Some economists believe markets will take a change of wording in their stride, but others hark back to "taper tantrums" after the Fed first mentioned the idea of gradually reducing monetary expansion in May 2013.

"It has to be done at some point, but it's like taking off a sticking plaster. It's going to hurt," said Rob Carnell, chief international economist at ING, who questions central banks' propensity to use set terms rather than just rely on data.   Continued...

 
A man wears U.S. dollar sign rings in a jewelry shop in Manhattan in New York City November 6, 2014. REUTERS/Mike Segar