WASHINGTON — Federal Reserve policymakers may signal at their meeting this week how and when the improving economy will lead them to start raising record-low interest rates.
Chairman Ben Bernanke and other Fed officials have signaled in appearances on Capitol Hill and in speeches that higher rates are still months away. They've indicated that low rates are still required to foster the economic rebound.
Yet once the recovery is firmly entrenched, Fed policymakers will need to raise rates to keep inflation in check. Before they do, they first will want to signal that credit will soon be tightened. The trick is doing so without jolting investors and borrowers, who would face higher rates on certain credit cards, some mortgages and other loans.
How best to telegraph the approach of higher rates is likely to dominate discussions when Bernanke and his colleagues meet Tuesday. In particular, the Fed will decide whether to keep, or water down, its year-long pledge to keep rates at "exceptionally low" levels for an "extended period."
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Economists generally think "extended period" means at least six more months.
The Fed could drop that commitment altogether. Or it could pledge to keep rates low for "some time," which is viewed as briefer than an extended period. Or it could change its language in some other way to stress that credit will be tightened when the time is right.
Any such step would send a signal that the days of easy money are fading.
The push for change is already under way inside the Fed. At its last meeting in late January, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, favored changing the language to say rates would stay low for "some time," according to the meeting's minutes.
Hoenig and other "hawks" on the Fed worry more about inflation heating up because of record-low rates than about keeping rates low to try to reduce the unemployment rate, now at 9.7 percent.
The fact that the jobless rate, though high, hasn't budged for two months and fewer jobs are being lost than a year ago suggests the recovery is on track. Factory and service-sector activity is picking up. Consumers and businesses are spending enough to keep the economy growing moderately.