EXCERPTS:
"Federal Reserve officials are likely to end their policy meeting later this month by reiterating that they expect to keep interest rates low for "an extended period"—despite uneasiness among some policy makers that the words limit the Fed's flexibility as the economy improves.
It is expected that central-bank officials will use speeches and interviews to emphasize that their commitment to hold rates near zero depends largely on how the economy behaves.
More-robust consumer spending has made policy makers more confident that a sustainable recovery has taken hold. With unemployment still high, inflation slowing and stable expectations for future inflation, top officials now see little urgent need to start signaling they are near raising rates. But if the outlook shifts, they say their stance will move....
For the Fed, managing expectations is a delicate task, influenced greatly by the words it chooses. Since March 2009, the Fed has said in each post-meeting statement that it expected the economy's performance to justify keeping short-term rates near zero for "an extended period."
The phrase was chosen to encourage investors to buy long-term bonds, which would keep long-term interest rates low, by signaling the Fed wouldn't move for a long time.
Officials now want to make sure the phrase doesn't handcuff them. Some policy makers have become frustrated that the statement is sometimes interpreted as an ironclad commitment to keep rates low for at least an additional six months. But dropping the closely watched words is unappealing, because it could be misinterpreted as a signal that a rate increase is imminent. So officials are looking for ways to underscore that their plans are conditional.
"Everything depends on how the economy performs," James Bullard, president of the Federal Reserve Bank of St. Louis, said in New York on Thursday. Speaking more broadly last week about how the Fed's exit from easy money policies will unfold, Fed governor Daniel Tarullo said, "it seems to me neither necessary nor advisable to decide upon a single game plan that will be announced in advance and rigidly implemented after a decision is made to raise rates."
