This Week's FOMC Meeting: Words Are Everything

FOMC meeting

Since December 2013, the U.S. Federal Reserve's Federal Open Market Committee (FOMC) meeting has been a routine exercise couched in humdrum Fedspeak and muted discussions on future monetary policy.

But with the meetings happening today (Tuesday) and tomorrow, it's becoming clear that the Fed can't stick to the same script for much longer, and, at some point, the nation's central bank is going to have to come clean on when it plans to raise interest rates from its near-zero levels.

This is because this meeting will mark the last time the Fed is going to trim its large-scale, two-year bond-buying program known as quantitative easing round 3 (QE3), before it exits the program altogether next month.

Since December, under former Fed chairman Ben Bernanke, the Fed has deemed the economy healthy enough to wean it off of its aggressive money-printing regime that began in Sept. 2012 and swelled the central bank's balance sheet from $2.9 trillion in assets to $4.5 trillion.

This came with the announcement that QE3, which began as a monthly $85 billion purchase of agency mortgage-backed securities and long-term treasuries - as a way to push down interest rates and bring more money into the broader economy - would be trimmed by $10 billion.

In each Fed meeting following that, the Fed has cut the program an additional $10 billion. After tomorrow's meeting, another $10 billion cut will trim the program down to a $15 billion-a-month program. Prior Fed minutes indicate that next month, the Fed will eliminate the program altogether.

But even as this easing is coming to an end, the Fed has echoed the same refrain on interest rates and hasn't deviated from its vague suggestion that interest rates should remain at near-zero levels for a "considerable" time.

So, when are we going to see a rise in interest rates?

The Fed's Interest Rate Wordplay

There's almost no chance that the answer will be clearer tomorrow, at least not in any explicit manner.

The only inkling Fed observers might get that Chairwoman Janet Yellen is considering a more open discussion on an interest rate timeline is through her words.

Yellen won't provide an overt blueprint of Fed interest rate policy. Instead, the "considerable" period will morph into a "softening to those words, or rhetoric moving away from keeping things as they are," Executive-in-Residence and Professor of the Practice at the University of Maryland's Robert H. Smith School of Business, Clifford Rossi told Money Morning.

With such a powerful influence on markets, Yellen isn't going to shake investor confidence by making an outright proclamation on interest rates.

In a press conference in March, following an FOMC meeting, Yellen was asked how long after the end of QE3 the Fed will be working to push up rates; she suggested it could be six months after its end.

At that time, it sounded like a more obvious timeline was set, different from what many Fed observers had anticipated. The consensus was that interest rates would spike sometime in the second half of 2015.

Yellen's comments, with the pace of tapering at the time, suggested the hike could come in the first half of next year.

This was enough to spook investors. The S&P 500 dropped 11.48 points, or 0.6% on the day, while the Dow Jones Industrial Average fell 114.02 points, or 0.7%.

That's what the markets will be watching from here on out. As Money Morning Chief Investment Specialist Keith Fitz-Gerald has said of recent Fed meetings, the major indexes are going to be looking for "whether or not Yellen deviates from anything she's said to date."

"That's what's going to have a material effect on the markets," Fitz-Gerald said.

As far as the economic projections that the Fed releases after each meeting are concerned, those aren't going to have much of an impact.

"The Fed has been wrong about every indicator it has ever looked at for the last 20 years," Fitz-Gerald said, "But especially its take on the economic health of the United States since the financial crisis started."

More on the Fed: James Rickards has been speaking out on the dangers of Federal Reserve policy for several years. Recently Money Morning conducted an exclusive interview with Rickards that covered not just the Fed, but an entire series of economic threats that he believes could send America into a 25-year depression. To watch this must-see interview, click here.