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 It remains to be seen whether decisions will be taken on either, but
it is clear that details on a so-called exit plan are nearly
complete, while discomfort is growing internally over a pledge to
keep rates near zero for a "considerable time."
Investors will parse the central bank's words closely for any clues
on the timing of the first U.S. rate hike in more than eight years.
Any major tweaks to its policy statement could cause ructions in
financial markets as investors recalibrate bets on benchmark rates
in the world's biggest economy.
A strong run of U.S. economic data has led Fed Chair Janet Yellen
and other top officials to acknowledge the possibility they may need
to raise rates sooner than they thought just a few months ago,
although a surprisingly soft reading on jobs growth in August could
provide some breathing room.
"The discussion itself is a testament to the underlying shift in
monetary policy," said TD Securities analyst Gennadiy Goldberg. He
said ditching the "considerable time" phrase would open the door to
a rate hike as soon as March, several months earlier than most
investors currently expect.
The Fed has kept overnight rates near zero since December 2008 and
has more than quadrupled its balance sheet through a series of
bond-buying programs designed to push down borrowing costs and boost
investment and hiring.
Fed policymakers have said they do not expect to raise rates until
2015, and their meeting next Tuesday and Wednesday looks certain to
end with no change in policy beyond a well-telegraphed reduction in
the central bank's asset purchases.
But officials will release fresh economic and interest-rate
projections, extending their forecast horizon through 2017. Those,
coupled with even minute changes in the Fed's post-meeting
statement, could reshape expectations for how soon and how fast the
central bank is likely to raise rates.
GROWING STALE
Fed officials from both ends of the policy spectrum have stepped up
calls recently to change what Cleveland Fed President Loretta Mester
termed the "stale" language on the likely timing of the first rate
hike.
The Fed has said since March it expected a "considerable time" to
elapse between the end of its bond buying, which is now slated for
October, and its first rate hike. "I believe it is again time for
the (Fed) to reformulate its forward guidance," Mester said last
week.
A few hours after Mester's remarks, Boston Fed President Eric
Rosengren, a stalwart backer of the central bank's aggressive
monetary policy easing, also called for ditching the
calendar-related guidance, while Philadelphia Fed President Charles
Plosser, who dissented against the language at the central bank's
last policy session in late July, reiterated his concerns on
Saturday.
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Top economists at a number of Wall Street firms, including Michael
Feroli at JPMorgan, Paul Ashworth of Capital Economics and Lewis
Alexander at Nomura, now see at least even odds that the Fed will
drop the "considerable time" phrase.
It could simply note that it can be "patient" in determining when to
raise rates or could emphasize, as Yellen did with a speech in
August, that the timing of a rate hike could move forward if
economic data comes in stronger than expected.
The guidance is only one of the tricky questions facing the Fed.
Officials also need to finalize details on how they plan to move
rates higher and keep inflation from igniting, given the
extraordinary liquidity sloshing around the financial system from
their purchases of government and housing-related debt.
Minutes from their July meeting show officials now generally agree
on several important changes to a set of exit principles first
published in 2011, including steps to prevent the Fed's balance
sheet from shrinking before rates rise. Most of them also now think
the Fed should hold on to most of the housing-backed securities it
has purchased.
Still under intensive discussion is how to use a newfangled tool
developed by the central bank's New York branch to help sop up
excess liquidity when the Fed starts tightening policy.
Minutes of the last meeting show it is increasingly likely the Fed
will relegate the new overnight reverse repurchase facility to a
supplementary and maybe temporary role, in part due to worries it
could spark "runs" from more risky markets in times of financial
stress.
Agreement on that matter could pave the way for public release of an
exit blueprint as soon as next week.
(Reporting by Ann Saphir in San Francisco and Michael Flaherty in
Washington; Editing by Tim Ahmann and Paul Simao)
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