Reading Tea Leaves of Fed Policymakers' Statements Require Experts

Just try deciphering the Federal Reserve's policy statements for clues about where interest rates are heading. It can be like trying to make sense of hieroglyphics.

Experts are needed to translate the symbols or pictures used in ancient Egypt, and the same is true for Fed-speak. Legions of economists, investors, analysts and others pore over those policy statements for hints about the future for interest rates and the economy.

Was a word or phrase added? Deleted? And, what does it all mean?

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The Fed deliberately is vague in the statements that explain its interest rate decisions. Since the policymakers cannot be sure about economic growth, inflation and employment, they want to leave themselves some wiggle room.

"Economics is part art as well as science," said economist Ken Mayland, president of ClearView Economics. "You can measure a physical quantity like the pull of gravity to many decimal points but nobody can say with any certainty what the inflation rate will be in the third quarter of this year and how much of a slowdown in the economy we will have."

Wiggle room is especially important now to Fed chairman Ben Bernanke and his colleagues at the central bank. Inflation has risen even though the economy is slowing. The Fed wants to push interest rates high enough to fend off out-of-control prices, but not so much that doing so would hurt the economy.

"This is a place where you can often make mistakes," said Laurence Meyer, a former Fed member. That makes it difficult to give the markets guidance on where interest rates are going, he said.

Fed statements also are difficult to understand because they represent the views not only of Bernanke but also of his colleagues on the committee that sets interest rates.

For example, some phrases may be added or removed to satisfy Fed members who perceive inflation as the biggest risk to the economy. At the same time, language may be included to adequately capture the concerns of other members who might worry more that economic growth could slow.

The Fed on Thursday raised rates to their highest level in more than five years. The statement did not rule out further increases, but raised hopes of a break in the two-year campaign of boosting rates to fend off inflation. The committee next meets on Aug. 8.

Wall Street rallied, sending stocks up 217.24 points on Thursday. It was the biggest single-day jump in more than three years and was evidence of just how much attention is paid to the Fed's words.

In their statement, Fed policymakers said "the extent and timing" of any additional increases would hinge on how inflation and economic activity unfold.

They dropped a phrase from the statement issued at its May 10 meeting that further increases "may yet be needed" to keep inflation at bay.

That omission — along with observations that growth was slowing — was seen by investors and some economists as the Fed's attempt to strike a less hawkish tone about the future course of interest rates.

A change of a word can hold meaning to Fed translators.

In May, policymakers said they saw "growth as likely to moderate." In Thursday's statement, they observed that "economic growth is moderating." The change moved slowing economic growth from a forecast to an acknowledged reality. That, in turn, gave more credence to the hope that a slowing economy eventually will lessen inflationary pressures.

When Bernanke took over on Feb. 1 as the successor to longtime chairman Alan Greenspan, Fed watchers hoped that the well-respected economist and academic would bring an end to "Greenspeak," the obscure style favored by Greenspan.

Bernanke, however, has had his own troubles sometimes communicating the Fed's intentions to Wall Street.

"The motivation is there. The intention is very very good, but sometimes the execution isn't as good as the intentions," former Fed member Meyer said.

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