DECIPHERING ‘FEDSPEAK’

Financial markets seem to hang on every word uttered or written by the Federal Reserve. But often those words appear vague or worse, contradictory. Such was the case recently when the country’s interest rate setters wrote about “policy firming” and not being “accommodative.” The language left even financial professionals scratching their heads.

The Wall Street Journal Sunday provided a little clarity for average folks in the aptly headlined column, “What the Fed’s Latest Mumbo Jumbo Means.” The article was printed after the Fed raised the federal funds rate, the interest banks charge one another on overnight loans, by one-quarter of a point for the 13th time since mid-2004.

The rate is now 4.25 percent, the highest in more than four years. The rate hike itself means that borrowers, especially those seeking a mortgage to buy a home, will pay more in interest. Savers will see their money grow a little bit faster with the higher interest rate.

It was not the rate hike but the statement that came with it that left a sense of confusion. Market insiders were pleased that the Fed would no longer be “accommodative,” which means, according to the Journal, that the Fed no longer sees itself as keeping rates on loans unusually low for businesses and consumers.

The Fed went on to say that “some further measured policy firming is likely to be needed.” The Journal calls that Fedspeak for more quarter-point increases. Most economists expect another quarter-point increase at the Fed’s next meeting Jan. 31. That is the last meeting for Alan Greenspan, who is retiring after more than 18 years as chairman of the Federal Reserve.

More rate hikes are also forecast because the Fed warned that “possible increases in resource utilization as well as elevated energy prices have the potential to add to inflationary pressures.” Translation: Higher labor costs, due to a tight job market, and high energy costs are likely to boost inflation.

Ben Bernanke, who could be confirmed as the new Fed chairman by the Senate early next year, is expected to work toward setting a public target for inflation, as central banks in Europe do. Now, the Federal Open Market Committee sets monetary policy based on an unannounced inflation target, typically increasing interest rates in response to inflation threats. This means investors do not know how long rates will rise to meet the unknown target. Setting a target provides more transparency, but also more risk that the target may not be met.

In the meantime, expect a few more interest rate increases and more mumbo jumbo explaining why.