Wanted: A dictionary for Fed’s statements

Jeannine Aversa

Monday, May 17, 2004 | 9:01 a.m.

WASHINGTON -- Whether you are an armchair Federal Reserve watcher on Main Street or a seasoned veteran on Wall Street, Fed policymakers sometimes seem to be speaking a foreign language.

Unfortunately, though, there are no Fed-speak-to-English dictionaries at the book store, next to ones that translate Spanish, French or German.

So, it is up to private economists, Wall Street analysts and other professional Fed watchers to give meaning to terms such as "resource use slack," "policy accommodation" and "unwelcome, substantial fall in inflation."

"It's really like Biblical type scholarship. We have to parse every word and nuance," said Tim O'Neill, chief economist at BMO Financial Group.

Proper translations are critical because Federal Reserve Chairman Alan Greenspan and his colleagues on the Federal Open Market Committee are responsible for setting interest-rate policy to keep the $11 trillion economy on an even keel. Every utterance can move financial markets, shape investor decisions and influence consumer behavior.

For those who do the translating, there is some hand-wringing and head scratching.

At the Fed's most recent meeting on May 4, policymakers dropped a promise, made in January and March, to be "patient" before they start raising rates. Most economists took that omission as a sign the Fed's first rate increase in more than four years would come this summer -- August or possibly June.

Fed policymakers in the May statement also added the phrase: "policy accommodation can be removed at a pace that is likely to be measured." Huh?

The term "policy accommodation" is Fed-speak for its current policy of easy credit. Short-term interest rates controlled by the Fed have been at 1 percent since last June. That's the lowest rate in 46 years.

"Can be removed" means taking back some of that easy money by moving interest rates up.

"At a pace that is likely to be measured." Economists interpreted that as a gradual increase, likely in one-quarter percentage points steps.

The Fed said it has the luxury of moving rates up at a measured pace because inflation is low and "resource use slack." Translation: Companies are still operating well below capacity and a lot of people who want jobs cannot find them.

Other entries in the Fed dictionary:

"Policy accommodation can be maintained for a considerable period," a phrase first used by the Fed in August. Translation: Rates will stay at super-low levels for some time.

"Geopolitical situation." Most recently used as reference to Iraq war

"Unwelcome, substantial fall in inflation." A reference to the threat of deflation, a widespread and prolonged price decline. The Fed was worried about deflation last year, but Greenspan told Congress recently that those concerns have all but disappeared.

"Reductions in equity wealth on consumption." In the spring of 2001, with the stock market plunging, the Fed was worried that investors' paper loss of trillions of dollars of wealth would crimp consumer spending, which accounts for two-thirds of economic activity. As the Fed would learn later, the economy had indeed entered a recession in March 2001.

"Increases in demand have remained in excess of ... gains in potential supply, exerting continued pressure on resources." Translation: The economy is booming and people's appetite for goods and services is outpacing the country's ability to meet demand. It's a recipe for inflation. That was the Fed's justification for its last rate increase, on May 16, 2000.

Some phrases are a little more basic:

"Policy tightening," which means raising interest rates.

"Policy easing," or lowering interest rates.

"Price stability." This is the Fed's main mission, to foster an economic climate where inflation stays under control and deflation does not take hold.

"Equity prices," or stock prices.

"Output." This is all goods and services produced in the country.

"Tight labor market." Companies' desire to hire is so great that there is a shortage of qualified workers to fill open slots. It occurs when the economy is hot and the unemployment rate is low.

Greenspan has uttered countless words as Fed chairman but it is fair to say that in 1996 he made two words famous, in a warning about the high-flying stock market at the time, "irrational exuberance." The decoded message: Stock prices are too high.

When it comes to interest rate policy, Greenspan might at times provide hints about possible moves, but he leaves it to the Fed watchers to try and connect the dots.

"I can't obviously stipulate where the Federal Open Market Committee is going to go or not go, because, one, I can guess, but I'm not sure, and in any event, if I could guess I shouldn't say what I guess," Greenspan told a senator at a hearing a few weeks before the May meeting.

Behind closed doors, policymakers' Fed-speak can be less pronounced and there are even glimpses of Fed humor.

At a Fed meeting in March 1998, Greenspan was told that a survey of Wall Street types produced no clear consensus on the Fed's next policy move: 16 predicted a rate increase; 12 forecast a rate cut; seven said the Fed would stand pat; one said it was not possible to assess accurately what the Fed will do.

"Give him an 'A'," Greenspan quipped, according to a recently released transcript of that meeting. The room erupted in laughter.

Fed member Cathy Minehan, not missing a beat, came back with: "Give us an 'A.' "