Fed chair Janet Yellen says the Fed isn't shifting gears… yet
Susan Walsh—AP
By Pat Regnier
September 17, 2014

Updated September 17 at 4:40 pm

It’s come to this: The market is obsessed with two magic words and a bunch of tiny dots.

Federal Reserve watchers have long been attuned to the subtlest cues from central bank officials—people used to look at the size of Alan Greenspan’s briefcase for clues—but this has been an unusually big week for minutiae. In anticipation of the Federal Open Market Committee’s 2 p.m. announcement of its latest decisions on monetary policy, markets were waiting to see if the committee would again use the phrase “considerable time” to describe how long it would hold the key short-term interest rate near zero.

They did. Here’s the statement:

That’s a relatively dovish signal, suggesting that rate hikes aren’t coming soon. Stock investors pushed prices a bit higher in the hours after the announcement, with the Dow closing at a record high of 17,156. But bond prices declined, with the 10-year Treasury bond yield ticking up to 2.164%. (Bond yields rise when prices fall.)

That may be because there was an asterisk to the “considerable time” language. The Fed also released a statement laying out the steps they’ll take to “normalize” interest rates when it’s time. Message: We aren’t doing it yet, we aren’t doing it right away, but we wanted to let you know we’re thinking about it.

Investors were also closely watching the “dot plot,” a chart showing where different Fed officials think interest rates will land in the coming years and over the long run. The dots didn’t change in a big way since June—most Fed officials want to keep interest rates where they are this year, but see them rising in 2015 as (presumably) the economy improves. Slightly more officials see 2015 as the “lift-off” date for rates than did in June.

The real story is how strongly opinions differ—those dots are pretty spread out after 2014. Fed chair Janet Yellen is widely considered to favor stimulative monetary policy, but this shows that she has to work with a much more hawkish group within the Fed that wants tighter money sooner, to prevent a surprise return of inflation. Right now, though, inflation is below the Fed’s 2% target.

These little signs have taken on outsized importance for two reasons. First, the Fed has played an unusually large role in supporting the (not-so-strong) recovery, by keeping short-term rates as low as they can go since the crisis days of late 2008, and then by buying up trillions of dollars worth of bonds as part of its unusual “quantitative easing” program. Second, investors in both stocks and bonds have been betting that this status quo is only going to change at a measured pace. This seems to have been confirmed.

This story was updated to reflect the market reaction to the Fed announcement.

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