The U.S. Federal Reserve is facing perhaps its most pivotal meeting of the year next week, as it debates a potential overhaul of its guidance on interest rates and seeks to nail down a plan for exiting its extraordinarily easy monetary policy.
It remains to be seen whether decisions will be taken on either, but it is clear that details on a so-called exit plan are nearly complete, while discomfort is growing internally over a pledge to keep rates near zero for a “considerable time.”
Investors will parse the central bank’s words closely for any clues on the timing of the first U.S. rate hike in more than eight years. Any major tweaks to its policy statement could cause ructions in financial markets as investors recalibrate bets on benchmark rates in the world’s biggest economy.
A strong run of U.S. economic data has led Fed Chair Janet Yellen and other top officials to acknowledge the possibility they may need to raise rates sooner than they thought just a few months ago, although a surprisingly soft reading on jobs growth in August could provide some breathing room.
“The discussion itself is a testament to the underlying shift in monetary policy,” said TD Securities analyst Gennadiy Goldberg. He said ditching the “considerable time” phrase would open the door to a rate hike as soon as March, several months earlier than most investors currently expect.