Fedspeak Sneak Preview: Jawboning Interest Rates Lower

by Alex Stenback on June 17, 2009

Next week, the Federal Reserve Open Market Committee will conclude a two day meeting with a policy statement and rate decision.  The Fed won’t change rates – this is a given – so the intrigue next week concerns what the Fed says in the policy statement.

Here’s why: Despite the fact that the Fed has (twice) publicly stated that they will keep the federal funds rate “exceptionally low” for an “extended period” many rates not under the direct control of the Fed (such as mortgage rates, for just one example) have shot higher in recent weeks as investors anticipate an economic recovery.

Higher rates, of course, may short-circuit this economic (and housing market) recovery. There’s some concern at the Fed, for sure, yet they have already committed billions to forcing rates lower, so there are real questions about where the Fed goes from here if lower rates are to remain a key piece of the anti-recession arsenal.

To that point, Bloomberg has published an interesting article examining how the Fed may use language, rather than the brute force of more money and new policy initiatives to snap investors back into the proper orbit, re-anchor their expectations for economic recovery, and move rates back down.  From the article:

Enhancing the statement with details on their latest views on inflation and joblessness might be the best way to back markets down from expected rate hikes. JPMorgan Chase estimates that labor-market slack won’t disappear until the unemployment rate drops to around 6 percent.

“How do you get people to believe what you have been saying?” [JO Morgan Chase & Co Economist Michael]Feroli said. “You say you are going to have a very large output gap for an extended period,” and even if the economy picks up “you still have a massive resource gap in the labor market.”

The question for mortgage rate watchers, of course, is, will it work?

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