Usually central bankers aren’t big into specificity. You know, they like to keep things loose. Play it by ear. See how things go.
So when the Fed inserted the sharply specific phrase “next meeting” into an otherwise colorless Federal Open Market Committee statement that left interest rates where they were, it stood out.
Here’s specifically what Fed Chair Janet Yellen’s FOMC said. (Emphasis ours.):
In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
That’s what the Fed said. But what did the Fed mean? Why was it so specific? What was the point of all this concrete-ness?
The thing to remember is, a few months back, everybody was expecting the Fed to raise rates in September. Then the markets freaked out about China’s apparently worsening slowdown. The Fed ended up holding its fire in September. And more recently, the markets seemed to be growing increasingly certain that the Fed wouldn’t raise rates today, or at its December meeting either.
By inserting “next meeting” into the statement, the Fed was trying to get attention. It wanted the market to snap out of it, and wake up to the fact that it was really possible that rates could rise in December. “The Fed very plainly want to knock market expectations into a position that they feel is more appropriate with the risks of them raising rates in December,” wrote Deutsche Bank analyst Alan Ruskin in a note to clients.
This is Janet Yellen channeling Cher in “Moonstruck.”
It seemed to work. Short-term US Treasury yields jumped pretty sharply after the Fed statement was released.
So does this mean the Fed will raise interest rates in December? Absolutely not. As the Fed said, that depends on the economic conditions. But if and when the Fed does raise rates, it does not want to surprise the markets. The central bank needed to get the attention of traders and investors and tell them, “Really, we seriously could raise rates in December. We’re not kidding.” And it worked.