Fed watchers wait for signal on rate moves
WASHINGTON -- Dec. 12, 2005 -- When Federal Reserve policymakers meet Tuesday, the focus will be less on what they do than on what they say.
Chairman Alan Greenspan and his colleagues are widely expected to raise interest rates a quarter-percentage point for the 13th-consecutive time at their meeting Tuesday. That will bring their target for short-term rates, which influence the cost of borrowing economywide, to 4.25%, the highest in 4 1/2 years.
But with another rate increase a given, Fed watchers are more eager to see what the policymakers say in their post-meeting statement. One-and-a-half years into its rate-raising campaign, some economists think it's time the Fed signal through a subtle shift in language that this era of rate rises may soon end.
"They are coming closer to the end of the tightening process," says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa.
Fed officials will have to tread softly, Zandi and other economists say. With the economy strong, the Fed likely will want to raise rates a couple of more times in 2006 -- starting with its next meeting at the end of January -- to head off inflationary pressures. So they will need to convey on Tuesday that there's still more work to do.
Fed officials discussed the need to alter their statement to the public at their meeting in November, according to minutes of the meeting released last month.
"Several aspects of the statement language would have to be changed before long," the minutes said. And some Fed members expressed concern that the risk of raising their target for short-term interest rates too far could "eventually emerge," according to the minutes.
Greenspan's retirement at the end of January is likely acting as a key factor in the policymakers' decision about when to change the language. Altering expectations before Greenspan retires will help smooth the transition when nominee Ben Bernanke takes the helm.
Otherwise, Bernanke could be seen as rocking the boat, potentially setting off jitters in financial markets.
"The argument is that if they are going to do it, better sooner than later," says Tucker Hart Adams, owner of economic consulting firm The Adams Group in Colorado Springs.
Fed statements have become a crucial source of insight into the thinking of policymakers about the future for interest rates since they were introduced under Greenspan. Investors, economists and other market participants carefully parse the statements to get an idea of where Fed policy is headed.
"This month's (meeting) will be one of the most interesting ones since the Fed first began raising rates in June 2004," Lehman Bros. economists wrote in a message to clients Friday.
