When the Federal Reserve's latest rate-setting meeting wraps up Wednesday, analysts will be watching closely for the fate of three little words.
If they remain in the Fed's public statement, the markets will take it as evidence that policy-makers remain comfortable with leaving things just the way they are during a period of rising market volatility, falling oil prices and low inflation.
But if the key words – "a considerable time" – are missing, it will be read as a hawkish signal that the long-awaited return to more normal interest rates is coming sooner rather than later.
Ever since the Great Recession of 2008, the Fed has vowed to keep short-term rates at rock-bottom levels for as long as necessary to get the U.S. economy back on its feet and people back to work. It also launched three unprecedented rounds of quantitative easing, buying huge amounts of bonds and other assets in an effort to lower longer-term rates and stimulate lending.
Last March, a couple of months after it had begun gradually reducing that massive bond-buying, the central bank reaffirmed that it would keep rates around zero for "a considerable time." And the phrase has remained a critical signal of the central bank's direction ever since.
Now, it appears poised to change that guidance, even as it leaves rates unchanged.
The hints come from a Wall Street Journal article last Monday by its Fed watcher, Jon Hilsenrath, who wrote that officials "are seriously considering an important shift in tone at their policy meeting."
It's not unusual for the Fed to provide an early warning to the markets of such a change. In this case, two of the central bank's more influential figures, vice-chairman Stanley Fischer and New York Fed president William Dudley, make an appearance.
"It's clearer that we're closer to getting rid of that [language] than we were a few months ago," Mr. Fischer told the WSJ. Mr. Dudley, meanwhile, has not used the phrase in recent speeches.
Until that article, "we were of the view that the Fed would maintain the same language, more or less, and wait to see how oil shakes out and how the key shopping season goes," said Doug Porter, chief economist with BMO Nesbitt Burns in Toronto.
"There was debate at the last [policy] meeting over whether to drop the 'considerable time' language. And it's erupted again," Mr. Porter said. "It does look to be a close call."
Still, the hawks-versus-doves debate on when to begin the next cycle of monetary tightening remains far from settled.
"There are obviously members who are going to be impressed by some of the stronger economic data," said long-time Fed watcher Robert Brusca, chief economist with FAO Economics in New York. "But I don't think that's going to change many opinions. The hawks on the committee will feel more like they're right and the Fed had better get moving. And the doves are going to feel that inflation is still undershooting."
Indeed, weak inflation numbers and a lack of strong wage growth rob the hawks of their favourite argument that higher interest rates are vital to keep prices and wage pressures in check as the recovery takes hold.
Inflation has consistently come in below the Fed's 2 per cent target for more than two years, and has averaged less than 1.5 per cent throughout the economic recovery. The Fed itself doesn't see any pickup in inflation before 2016.
Mix in the deflating impact of falling oil prices on the U.S. economy – which the Fed regards as a temporary phenomenon – and more stumbles in Europe, China and Japan, and there seems little logic in switching to a tightening bias now.
"It's not even clear that the Fed is going to tighten next year," said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates in Toronto.
"The markets are thinking the mid-part of 2015. That's partly because various Fed officials have been talking about that particular time frame. But we know that's a moving target … It may well be years before the Fed or the Bank of Canada embark on a renewed tightening cycle."
Mr. Brusca agrees. "As long as the economy is still growing weakly and there's no risk from inflation, there's no danger in the Fed saying rates will be low for a considerable period of time. We know for a fact that when things change, the Fed will have to raise rates. But there's no evidence that anything is changing."
Even when the United States shrugs off the effects of cheaper oil and inflation picks up a bit, Fed chief Janet Yellen and her colleagues should be in no rush to tighten policy … regardless of whether they keep those three little words of guidance.