US Federal Reserve: One Statement, Two Words!

With recent US data picking up, investors will be   gin to once again focus more on the timing of interest rate hikes and the implications for financial markets. While no change to monetary policy is expected investors will eye the wording of the Fed’s statement, most importantly whether they decide to keep “considerable time” to describe the timing of rate hikes. It was first added in December 2012 in an effort to signal to the markets that monetary policy would stay accommodative after the ending of the asset purchase program. For example, the most recent statement in October read: “The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month”.

The Fed have never clarified exactly what “considerable” means in terms of the length of time. In March, Fed Chair Janet Yellen caused the markets to sell off with her off-script remark that it “probably means something on the order of around six months or that type of thing”. While Yellen and the Fed later backed away from this remark it has not been forgotten. Therefore, if “considerable time” is removed it will be the first real signal confirming that the interest rate hike is on the way in the first half of 2015. However, given the sharp sell-off in the price of oil and the worry in financial markets last week it is likely the Fed will avoid adding to concerns.