What It Means If Fed No Longer Says It's 'Patient' on Rates
What It Means If Fed No Longer Says It's 'Patient' on Rates, For the Federal Reserve, patience may no longer be a virtue.
Surrounding the Fed's policy meeting this week is the widespread expectation that it will no longer use the word "patient" to describe its stance on raising interest rates from record lows.
The big question is: What will that mean?
Many economists say the dropping of "patience" would signal that the Fed plans to start raising rates in June to reflect a steadily strengthening U.S. job market. Others foresee no rate hike before September. And a few predict no increase before year's end at the earliest.
Complicating the decision is a surging U.S. dollar, which is keeping inflation far below the Fed's target rate and posing a threat to U.S. corporate profits and possibly to the economy. A rate increase could send the dollar even higher.
In a statement it will issue when its meeting ends Wednesday and in a news conference Chair Janet Yellen will hold afterward, the Fed isn't likely to telegraph its timetable. Yellen has said that any decision to raise rates will reflect the latest economic data and that the Fed must remain flexible.
Still, nervous investors have been selling stocks out of concern that a rate increase — which could slow borrowing and spending and weigh on the economy — is coming soon.
"I think the odds are better than 50-50 that the Fed ... will drop the word 'patient' at the March meeting, and that would put an initial rate hike in play, perhaps as early as the June meeting," said David Jones, author of several books about the Fed.
Historically, the Fed raises rates as the economy strengthens in order to control growth and prevent inflation from overheating. Over the past 12 months, U.S. employers have added a solid 200,000-plus jobs every month. And unemployment has reached a seven-year low of 5.5 percent, the top of the range the Fed has said is consistent with a healthy economy.
The trouble is that the Fed isn't meeting its other major policy goal — achieving stable inflation, which it defines as annual price increases of around 2 percent. According to the Fed's preferred inflation gauge, prices rose just 0.2 percent over the past 12 months. In part, excessively low U.S. inflation reflects sinking energy prices and the dollar's rising value, which lowers the prices of goods imported to the United States.
It isn't just inflation that remains below optimal levels. Though the job market has been strong, the overall economy has yet to regain full health. The economy slowed to a tepid 2.2 percent annual rate in the October-December quarter, and economists generally think the current quarter might be even weaker. Manufacturers are struggling with falling exports, partly because of the strong dollar, and consumers — the drivers of the economy — have seemed reluctant to spend their windfall savings from cheaper energy.
What's more, pay for many workers remains stagnant, and there are 6.6 million part-timers who can't find full-time jobs — nearly 50 percent more than in 2007, before the recession began.
For those reasons, some analysts think it would be premature to raise rates soon.
"The last thing the Fed wants to do right now is spook the markets and the economy into an even slower growth trajectory," said Brian Bethune, an economics professor at Tufts University.
Surrounding the Fed's policy meeting this week is the widespread expectation that it will no longer use the word "patient" to describe its stance on raising interest rates from record lows.
The big question is: What will that mean?
Many economists say the dropping of "patience" would signal that the Fed plans to start raising rates in June to reflect a steadily strengthening U.S. job market. Others foresee no rate hike before September. And a few predict no increase before year's end at the earliest.
Complicating the decision is a surging U.S. dollar, which is keeping inflation far below the Fed's target rate and posing a threat to U.S. corporate profits and possibly to the economy. A rate increase could send the dollar even higher.
In a statement it will issue when its meeting ends Wednesday and in a news conference Chair Janet Yellen will hold afterward, the Fed isn't likely to telegraph its timetable. Yellen has said that any decision to raise rates will reflect the latest economic data and that the Fed must remain flexible.
Still, nervous investors have been selling stocks out of concern that a rate increase — which could slow borrowing and spending and weigh on the economy — is coming soon.
"I think the odds are better than 50-50 that the Fed ... will drop the word 'patient' at the March meeting, and that would put an initial rate hike in play, perhaps as early as the June meeting," said David Jones, author of several books about the Fed.
Historically, the Fed raises rates as the economy strengthens in order to control growth and prevent inflation from overheating. Over the past 12 months, U.S. employers have added a solid 200,000-plus jobs every month. And unemployment has reached a seven-year low of 5.5 percent, the top of the range the Fed has said is consistent with a healthy economy.
The trouble is that the Fed isn't meeting its other major policy goal — achieving stable inflation, which it defines as annual price increases of around 2 percent. According to the Fed's preferred inflation gauge, prices rose just 0.2 percent over the past 12 months. In part, excessively low U.S. inflation reflects sinking energy prices and the dollar's rising value, which lowers the prices of goods imported to the United States.
It isn't just inflation that remains below optimal levels. Though the job market has been strong, the overall economy has yet to regain full health. The economy slowed to a tepid 2.2 percent annual rate in the October-December quarter, and economists generally think the current quarter might be even weaker. Manufacturers are struggling with falling exports, partly because of the strong dollar, and consumers — the drivers of the economy — have seemed reluctant to spend their windfall savings from cheaper energy.
What's more, pay for many workers remains stagnant, and there are 6.6 million part-timers who can't find full-time jobs — nearly 50 percent more than in 2007, before the recession began.
For those reasons, some analysts think it would be premature to raise rates soon.
"The last thing the Fed wants to do right now is spook the markets and the economy into an even slower growth trajectory," said Brian Bethune, an economics professor at Tufts University.