Fed's Rate Increases May Come Quickly

Many analysts had interpreted a "measured" pace to mean quarter-percentage-point or half-point increases spread over many months or even a few years, gradually lifting the rate target to a level that neither stimulates nor slows economic growth. Abandoning a "measured" pace would mean raising rates more rapidly or in larger steps.

"The word 'measured' is definitely dead," Sung Won Sohn, chief economist for Wells Fargo Economics, said yesterday. "They are saying, 'We are free to do what we have to if inflation goes up more than we expect. [If so,] we will raise rates more than you expect.' "

The burst of Fed commentary on the likely course of policy is part of an effort to better communicate the central bank's thinking to financial markets in order to help investors adjust to likely changes in policy. Fed officials want to avoid the kind of financial turmoil that occurred in 1994-95, when they lifted their target to 6 percent from 3 percent in 12 months.

Guynn said that relatively rapid pace of rate increases is "unlikely" this time around because the inflation rate is lower and the financial sector is healthier.

Consumer prices, excluding those for food and energy, rose 1.4 percent in the 12 months ended in May, according to the Commerce Department's core personal consumption expenditure index, a measure favored by the Fed. That is a low inflation rate, but it has moved steadily upward since December, when the 12-month index was up 0.8 percent.

Nearly a year ago, the Fed lowered the target to 1 percent, the lowest level since 1958, in large part because inflation was falling so close to zero that officials worried it might give way to a destabilizing deflation, a drop in the overall price level.

Pianalto reminded listeners that in the May statement, when they thought a "measured" pace of rate increases likely, Fed officials also said they believed it was as equally likely that inflation would fall or rise.

She also noted that the wording used in Fed statements about the likely course of interest rates has shifted in step with changes in the language used to describe the inflation outlook.

That implies that if the Fed drops the word "measured" from its statement after the next meeting, as some analysts expect, it probably will change its language to reflect a perception that the risk of rising inflation is now greater.

Pianalto pointed to the prices of futures contracts tied to the Fed funds rate as evidence that investors anticipate a rate increase. In case anyone hadn't got the message by yesterday, Guynn all but declared that an increase is in store, without specifying the size.

"Given the economic growth and rising prices now unfolding, the general direction of our next policy move should be clear -- barring any unexpected events," he said.