How Important Is The Word ‘Patience’ For The Fed?

Federal Reserve officials entered a self-imposed blackout on March 10th, in which they stopped making public comments about the economy and monetary policy.  They then engaged in intensifying discussions about the statement that will come out of their policy meeting this week, states the Wall Street Journal.

This Wednesday, the Federal Reserve will release the statement from its two-day Federal Open Market Committee (FOMC) meeting, and investors are keeping a sharp lookout for whether the word “patient” still appears in the statement.  The word “patient” is a key reference to when the Fed will begin hiking interest rates, states MarketWatch.

That one detail is crucial for how stocks fare this week.

The Wall Street Journal claims that it is clear that officials intend at the March 17-18 meeting to drop the “assurance” that they’ll be “patient” before raising short-term interest rates.

Cleveland Fed President Loretta Mester effectively gave her support for such a move in comments Monday, March 9th, saying she wanted to have the option to raise rates in June.  To have such an option, officials need to remove the word “patience” from their statement in March, states WSJ.

The Fed has received two signals in the last couple of weeks which reinforce its confidence about removing the “patience assurance,”  claims the WSJ.

First, Fed Chairwoman Janet Yellen signaled in her testimony to Congress an inclination to drop the word “patience,” and the market took the comments fine.  Officials had been worried that interest rates would jump and stocks tumble when they dropped the “patience assurance,” effectively bringing forward interest rate increases before the Fed is actually ready to raise rates. When the market didn’t respond, the Fed got a signal the coast is clear.

On Friday March 6th, the Labor Department reported another drop in the unemployment rate to 5.5%, meaning the economy is closer to a state of “full employment” when more people are employed and inflation bubbles up.

So incoming economic data are supporting the Fed’s forecast for the economy, another reason to take a small step in the long march move toward rate increases later this year.

“The biggest short term question with regard to the March FOMC (Federal Open Market Committee) is whether the committee chooses to include the ‘patient’ term in their policy statement or drop it,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, in a recent note.

LeBas believes the Fed will leave “patient” in its statement, signalling a rate hike closer to September than June.

“In terms of impact, retaining the word would imply a first rate hike would be most probable after June and by September 2015,” he said.

For quite a while, the consensus estimate had been that the Fed would start hiking rates in June, but analysts and economists are increasingly nudging the move out to September.