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BUSINESS
Janet Yellen

Fed meeting may give clues on interest rates

Paul Davidson
USA TODAY
Federal Reserve chair Janet Yellen has downplayed inflation concerns. (epa, Shawn Thew)

With the Federal Reserve all but certain to continue winding down its economic stimulus this week, analysts will be scouring its statement for changes that could shed light on when it will begin raising interest rates.

At its two-day meeting that ends Wednesday, the Fed is expected to further reduce its purchases of Treasury bonds and mortgage-backed securities, to $25 billion a month from $35 billion. Citing a strengthening labor market, Fed Chair Janet Yellen has said the program, which is intended to hold down long-term interest rates and spur the economy, will likely end in October.

Fed policymakers are having a more vigorous debate about when to begin raising its benchmark short-term rate, which has been near zero since the 2008 financial crisis.

Most of the policymakers expect the first rate hike no earlier than mid-2015, according to their median estimate. Despite an unemployment rate that has declined rapidly, Yellen has pointed to the still-large ranks of the long-term unemployed and part-time workers who prefer full-time jobs.

Yellen also has downplayed this year's pickup in inflation toward the Fed's 2% annual target, saying tepid wage growth continues to keep consumer prices in check.

Some economists, however, say falling unemployment and rising inflation will force the Fed to raise short-term rates early next year. Since the Fed's mid-June meeting, the Labor Department has reported that last month employers added 288,000 jobs and the jobless rate fell to 6.1% from 6.3%. The rate has fallen from 7.5% year ago and is edging closer to the roughly 5.5% that the Fed deems normal.

As a result, instead of saying the unemployment rate "remains elevated," as it did in its June statement, the Fed could say it's "somewhat elevated," JPMorgan Chase economist Michael Feroli wrote in a note to clients.

Such a change, he says, "would allow a more gradual pivot in communications toward recognizing they are making progress toward their mandate" of full employment amid stable prices. It also could fuel speculation of an earlier-than-anticipated rise in interest rates.

On the other hand, core inflation, which excludes volatile food and energy prices, moderated substantially last month and "likely reinforced" policymakers' decision to downplay the threat of inflation in the June statement, Goldman Sachs economist David Mericle wrote in a report.

Also, Mericle says, last week's weak report on new home sales amplified concerns about the sluggish housing market.

The economy's conflicting indicators make it unlikely the Fed will shift its message to signal the possibility of an earlier rate hike.

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