The Federal Reserve is expected today to announce the end date for its huge trillion-dollar bond-buying program, also known as QE3. But most attention will be on whether it uses two key words -- "considerable time" -- in regard to how much longer the Fed plans to keep its benchmark interest rate near zero percent. If those words are missing from the Fed's announcement when the meeting ends, it could mean the central bank plans to raise interest rates soon.
The members of the Fed's rate-setting Open Market Committee (FOMC) held meetings yesterday and will conclude today, then release an official statement at 2 p.m. A half-hour later, Fed Chair Janet Yellen will hold a press conference.
The central bank is likely to say, for the seventh consecutive meeting, that it's tapering its monthly bond-buying program by $10 billion, bringing QE3 down to only $15 billion per month (from a monthly high of $85 billion).
In previous announcements the Fed has said asset purchases "are not on a preset course," meaning they had no set end date. That could change as officials have indicated they intend to end the program after the Fed's next meeting at the end of October.
If they do that, it will remove any obstacles to the Fed raising interest rates for the first time in eight years. And that's where those two little words will come into play, said Jan Hatzius of Goldman Sachs (GS).
"On its own, a removal of 'considerable time' ... would be a big hawkish shift," he said in a note to investors. "The FOMC would be viewed as reneging on its prior commitment to keep the funds rate unchanged through April 2015 (i.e., about 6 months from the end of the purchase program in late October)."
On the other hand, the Fed usually makes such a rate hike to keep inflation in check, and at her last press conference, Yellen made it clear inflation was less than what she was hoping it would be.
Regarding the likelihood of a rate hike sooner than mid-2015, Hatzius noted: "Such a shift might be warranted if the news about the recovery had changed substantially, but that is not the case. Indicators of output growth such as real GDP and the ISM [readings from the Institute for Supply Management] have improved, but labor market improvement has slowed, inflation has come back down, and financial conditions have tightened a bit. Consistent with this, we see few signs that the center of the committee has moved its liftoff date forward from mid-2015."
As with any Fed announcement, analysts and investors will be examining all the language closely for hints into its policy views. But this time, the scrutiny will be nearly microscopic.
In July, the Fed said "growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further." That report also said, "[A] range of labor market indicators suggests that there remains significant underutilization of labor resources."
If the Fed's policymakers still believe this to be the case -- and most recent employment report showed employers added a disappointing 142,000 jobs in August -- that could mean they aren't ready to tighten the credit markets by raising interest rates. We'll know soon enough which call they make.