WASHINGTON – After months of explicit guidance on interest rates, the Federal Reserve is about to get a lot more cagey, and markets are already on edge.
The U.S. central bank has signaled one or two more quarter-percentage point moves up, but then things get murky.
Reliable signposts like "measured" — a guiding light for financial markets since May 2004 — may soon vanish, if not at the Fed's next meeting on January 31, then at the subsequent gathering in March. Markets then would be on their own.
Minutes of the Fed's mid-December meeting released this month showed officials believed a post-meeting statement that "some further measured policy firming" would likely be needed would signal that only a small number of rate rises lay ahead.
At the same time, officials have said data will increasingly drive policy.
The heightened uncertainty over the direction of rates, which coincides with the expected passing of the baton from Fed Chairman Alan Greenspan to White House adviser Ben Bernanke, has already upset the dollar and buffeted interest rate futures, even though data point to a soft economic landing.
It also may soon end the easy life of Fed watchers, who for the last 18 months have been safely able to predict quarter point increases at every meeting given long-standing Fed guidance that rates would be raised at a "measured" pace.
With the benchmark federal funds rate now at 4.25 percent, several officials believe it is close to the elusive neutral level that neither boosts nor hobbles economic growth.
Analysts are now bracing for a less-predictable future.
"When the Fed itself doesn't know what it is going to do after its next meeting, life becomes much harder for the forecasting community," said David Jones at DMJ Advisers.
Fed officials repeatedly have said their long period of holding the market's hand would eventually end.
Atlanta Federal Reserve Bank President Jack Guynn, a voting member of the Fed's rate-setting panel this year, suggested in a speech on Monday the end was near.
"While our policy direction has been quite clear over the past 18 months, in the less certain period ahead it's my personal opinion that as policymakers we should resist the temptation to say more than we know at any given time."
"The closer we get, the less explicit we can be on that point," he said.
NOT SO SURE ANYMORE...
If policy makers do not feel fairly certain on January 31 that they will have to raise rates again at their subsequent meeting on March 28, any suggestion that a further "measured" firming was likely could be misleading. In that event, they may signal a further rate increase was possible, but not necessarily likely.
"It's not a lack of transparency when you stop giving information when there is nothing to give, and we're getting pretty close to that point," said Alan Blinder, a former Fed vice chairman who now teaches at Princeton University.
Futures markets currently predict the Fed will raise rates to 4.5 percent at the end of the month and see the odds of an additional move in March at slightly better than 50/50.
"I am personally very comfortable with what is built into markets," Guynn said on Monday.
Economic data since the Fed's mid-December meeting have done little to shift the outlook, with prospects for solid growth and moderate inflation on track amid signs a red-hot housing market is gradually cooling.
"The data is cooperating with the view that we'll have one or two more Fed tightenings," said Anthony Chan, chief economist at JPMorgan Private Client Services.
Richmond Fed President Jeffrey Lacker, who signed on to the view of the U.S. economy achieving a soft landing, said that interest rates could fluctuate in a range going forward.
"Whenever the current sequence of tightening moves reaches completion, short-term interest rates should not be expected to remain constant for an extended period of time," Lacker said on December 22. "Instead, they will likely move from time to time during the expansion ahead."