Fed struggling with one key sentence in its post-meeting statement

Jerome
Powell testifies before the Senate Banking, Housing and Urban
Affairs Committee on his nomination to become chairman of the
U.S. Federal Reserve in Washington, U.S., November 28,
2017.
Joshua
Roberts/Reuters

• The Federal Reserve is considering a key milestone in
  its public communication about the path of interest
  rates.
• Wall Street economists think a language change is
  coming that will signal monetary policy is no longer loose,
  meaning interest rates are no longer seen as particularly
  low.
• This week’s meeting may be too soon; it’s more likely
  such a shift will come in September, when the Fed is next
  expected to raise interest rates.

Federal Reserve officials meeting this week are grappling
with an important milestone in their effort to raise interest
rates gradually without derailing the economy: When to tell the
world that interest rates are no longer all that low — or more
accurately, that monetary policy is no longer “loose.”

This is how the internal debate at the US central bank was
characterized in minutes to the
Fed’s June meeting. 

“Many (officials) noted that, if gradual increases in the
target range for the federal funds rate continued, the federal
funds rate could be at or above their estimates of its neutral
level sometime next year. In that regard, participants discussed
how the Committee’s communications might evolve over coming
meetings if the economy progressed about as anticipated; in
particular, a number of them noted that it might soon be
appropriate to modify the language in the post-meeting statement
indicating that the stance of monetary policy remains
accommodative.”

Ward McCarthy, Jefferies chief financial economist, says he
does not expect any tweaks to come at this week’s meeting, which
is also not expected to yield another interest rate hike.

“How soon is soon? We think that August 1 is too soon,” he
writes in a research note. “
However, we cannot
preclude the possibility that the FOMC alters the language in the
August 1 policy statement to set the stage for the modification
of the phrase ‘the stance of monetary policy remains
accommodative.'”

But McCarthy adds: “The most efficient change on August 1
would be to change the statement to ‘the stance of monetary
policy remains accommodative for now.'”

The Fed has raised interest rates several times since
December 2015 to a range of 1.75% to 2%. That may seem low
historically, but comes in the context of an employment recovery
that has taken so many years to make up the ground lost during
the Great Recession.

Morgan Stanley economist Ellen Zentner and her colleagues
are on the same page on the likely timing of the Federal Open
Market Committee’s language shift:

“We do expect that after raising rates at the September
meeting, the FOMC may look to adjust its assessment that the
stance of policy ‘remains accommodative,’ but that reference is
likely to remain unchanged in the August statement for now,” the
bank’s economists write in a research note. 

“The bulk of the changes we expect will be a mark-to-market
in the section describing current economic conditions to reflect
recent data.”