Capital Markets

For Fed-Watchers, a Few Words Pack ”Considerable” Clout

Is this the first small step toward raising interest rates?
Stephen TaubJanuary 29, 2004

Did the Federal Reserve chance its stance on its policy toward fighting potential inflation?

That’s what Treasury investors seem to think after the release of a statement Wednesday by the central bank’s policy-making Federal Open Market Committee (FOMC), which decided to keep its target for the federal funds rate at 1 percent.

Eurodollar futures as well as the two-year Treasury note — the most sensitive to Fed policy hints — plunged in price.

Why such a violent reaction?

In an accompanying statement, the FOMC said it continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. It added, however, that “with inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation.”

Those last few words — “patient in removing its policy accommodation” — supplanted an earlier phrase in which the FOMC resolved to keep rates low for a “considerable period.”

A seemingly small change, but interpreted by many as a first small step toward raising interest rates, according to published reports.

We’re watching.

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