Gimlet-eyed observers will be looking at the statement that will follow this week’s meeting of the Federal Reserve Open Markets Committee (FOMC) for any hints about one key piece of information: when the Fed will start raising interest rates.
The timing of the central bank’s end to asset purchases has become a minor consideration. Whether the tapering of these starts in September or December matters little in practice. It is accepted by investors that, barring a sharp deterioration in the U.S. economy, the program will be done by the middle of next year. Even many of the doves on the FOMC go along with that. They accept that any soft spots showing up in the economic indicators are just that — isolated spots of softness.
The pace of the exit, then, becomes a matter of arithmetic. Fed Chairman Ben Bernanke has, however, been laying the groundwork for markets to understand that the Fed sees quantitative easing and interest rates as separate policy tools. To calm their skittishness about the coming end to the asset purchase program he has signaled an extended period of low rates even as the program winds down. In his Congressional testimony in mid-July, he went out of his way to stress that accommodative monetary policy will “remain appropriate for the foreseeable future.”
What Bernanke is looking to do is to shift the mix of monetary policy while maintaining the current level of accommodation for as long as the modest-to-moderate pace of growth and job creation that the Fed expects through the rest of 2013 and beyond continues. The forward guidance part of the statement may well be used to reinforce the message of that intention.
The economic outlook part of the statement could be a tad more dovish if the second quarter GDP figure — also due this week and to which the FOMC will be privy — is as weak as expected. But even that should point to an extended period of low interest rates, not to any stay of execution for the tapering of the asset purchase program. How dovish the changes to the economic outlook are, if there are any changes to the wording at all, is what will be pored over for clues as to how long that extended period might be.