A Layman's Guide to Fedspeak

Greenspan & Co. are the masters of coded language. Here's a look at what the Fed really means, vs. what it says

By Kathleen Madigan

In the world of Federal Reserve watchers, analyzing the nuance of a phrase or the use of an adverb in a certain context has become an art form among economists and investors. The latest focus of attention: the word "measured" (see BW Online, 3/24/05, "Is the Fed Dragging Its Feet?")

In its Mar. 22 policy statement, the Fed retained its use of that word, stating it would increase interest rates at a "measured" pace. That guidance has been in place since May, 2004, meant to signal that the central bank plans to raise rates gradually. Indeed, it has raised short-term rates seven times in quarter-point increments since then.

Yet the Fed now recognizes that inflationary pressures have picked up and some of the language in its latest statement prompted speculation that the Central Bank will drop the all-important word at its next meeting on May 3. That has Fed watchers wondering: What new key words, freighted with meaning, will they have to parse next in order to read the tea leaves? Here are a few highly subjective and hypothetical examples of what the new language might look like:

Possible Statement: "Data suggest growth is stronger than expected, and oil prices remain intransigent. Therefore, the Committee believes policy accommodation can be removed at a more determined pace."

Real Meaning: Don't worry. Be happy. Sure, oil is still at $57 a barrel, and demand is exploding. But it will take just one half-point hike in the federal funds rate to keep inflation pressures in check. Aside to bond investors: We are still in control, so there's no need to go crazy with long-term rates, please....Pretty, please.

Possible Statement: "The expansion appears to be in a more sustainable upward path. As such, the [Fed's policy-making Open Market] Committee has voted to remove prior accommodation at a more assertive pace."

Real Meaning: The economy is probably growing faster than 4% in the first half. We may need to hike the rate by half-points at two or three meetings. Yeah, we see the irony, too: The healthier the economy looks, the quicker we want to beat it down with a hammer.

Possible Statement: "Now that the labor markets appear fully recovered, if not accelerating, the Committee has decided that a potentially more aggressive pace is required to remove past policy accommodation."

Real Meaning: Wow, we did not see those 300,000 job gains in March and April coming. You could have knocked us over with a feather. Half-point hikes are the way to go from now on. Trust us.

Possible Statement: "With foreign-exchange markets expressing reservations about the value of the dollar, the Committee believes it should tighten policy in an expeditious fashion."

Meaning: Who told Treasury Secretary John Snow to jawbone those exchange rates? Now, the dollar is falling faster than Jeff Gordon takes a curve at Daytona. Yikes. Look for an intermeeting hike if the greenback hits $1.75 to the euro.

Possible Statement: "In the past three months, businesses have added jobs well in excess of one million slots, and cost pressures have spread beyond energy-related items, while the dollar continues to decline. Given the growing evidence of rising inflationary trends, the Committee believes it must tighten monetary policy in all due haste and speed."

Meaning: Oops. Boy, did we blow it.

Madigan is Business Outlook editor for BusinessWeek in New York

Edited by Beth Belton

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