Fed Officials May Offer More Clarity On Rates

        Federal Reserve officials are likely to emerge from their policy meeting Wednesday with short-term interest rates still pinned near zero, though they could send fresh hints that they're getting closer to raising rates. Fed Chairwoman Janet Yellen emphasized in congressional testimony earlier this month she expects the central bank to start lifting its benchmark federal-funds rate at some point before year-end.
        Her comments and other recent public statements by Fed officials have made clear that July is too soon. Though the economy is growing moderately after contracting in the first quarter and employers are hiring at a solid pace, inflation remains stubbornly below the Fed's 2% target and officials want to be more confident it is going to rise before acting.
        This week "might be a little early. I think we'll use that meeting to assess the data," James Bullard, president of the Federal Reserve Bank of St. Louis, said last week on Fox Business Network. He added, "I'd see September having more than a 50% probability right now."
        Most private economists surveyed by the Journal think liftoff is likely at the Fed's September meeting. Many market participants expect policy makers to wait until December.
        This leaves the Fed with a slight signaling challenge at the meeting this week. How aggressively should officials tip their hands about the timing of a rate increase later this year? Fed officials don't want to take financial markets by surprise by raising the benchmark federal-funds rate for the first time since 2006 with no forewarning. At the same time, they want to keep their options open so they can adjust their stance as the economy evolves.
        The last time the Fed commenced a series of interest-rate increases, officials cocked the starter's pistol one meeting before they acted. In that episode, they dropped an assurance from their May 2004 policy statement that the Fed would be patient before raising rates and instead said they would move at a measured pace, then raised rates at the next meeting.
        Fed officials at their April meeting debated whether to offer an "explicit indication" ahead of the expected first rate increase, as they did in 2004, but minutes of the meeting showed they chose a different approach.
        Most felt the timing of the first rate increase "would appropriately be determined on a meeting-by-meeting basis," meaning they could move with no formal advance signal, the minutes said. Some officials said the Fed's description of the economy, the outlook and progress toward its goals would provide the key clues. In other words, the more progress the Fed cites, the closer it is getting to liftoff.
        Ms. Yellen highlighted the Fed's flexibility earlier this month while testifying before Congress. Most central bank policy makers expect to raise rates this year, but "these are projections based on the anticipated path of the economy, not statements of intent to raise rates at any particular time," she said.
        She offered lawmakers cautious optimism on the economy, pointing to declines in long-term unemployment and involuntary part-time work as well as "tentative signs" of stronger wage growth. While the U.S. remains short of full employment, she said, the labor market is getting "demonstrably closer" to a more normal state. She also highlighted a pickup in consumer spending. "Prospects are favorable for further improvement in the U.S. labor market and the economy more broadly," she said.
        Weighing against that optimism, Ms. Yellen acknowledged that inflation remains well below the Fed's 2% annual target, as it has for more than three years. Monthly price readings "have firmed lately," she said, but annual inflation will likely remain low for now.
        Officials have said they would stay on hold until they're "reasonably confident" that inflation will move back to 2%.
        "The point of being data dependent is that information drives your decisions, and while my forecast looks great, I am wary of acting before gathering more evidence that inflation's trajectory is on the desired path," Federal Reserve Bank of San Francisco President John Williams said in mid-July.
        Observers will have little more than the Fed's policy statement to parse on Wednesday. Officials won't release new economic projections, and Ms. Yellen's next post-meeting news conference is scheduled for September. Minutes of the July meeting, which will be released with a three-week lag, could also provide clues about how close officials believe they are getting to raising rates.
        There will be one new face at the table this week: Patrick Harker, who took office July 1 as president of the Federal Reserve Bank of Philadelphia. Mr. Harker, an engineer by training and previously president of the University of Delaware, will participate in the discussion but doesn't have a vote this year on the rate-setting Federal Open Market Committee.
        Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com
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        (END) Dow Jones Newswires

        July 26, 2015 20:40 ET (00:40 GMT)

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