Free exchange | The Fed's meeting

A loss of patience

The Federal Reserve has dropped the word “patient” from its monetary-policy statement

By C.W. | LONDON

RARELY have investors lavished so much attention on a single word. After a two-day meeting, the Federal Reserve dropped the word “patient” from its monetary-policy statement. Why the fuss over this single word?

"Patient”, in Fed-speak, indicates that it will hold off increasing interest rates for at least two meetings. Now the word has been ditched, at subsequent meetings (most probably in June) we could see rates move off from rock-bottom for the first time since 2008.

The last rate-tightening cycle began over a decade ago. The Fed feels comfortable, it seems, with raising interest rates now that unemployment has moved towards 5.5%. The latest forecasts from the Fed show that it expects the economy to expand by 2.3%-2.7%, a slight fall from the projections in December but still one of the strongest in the OECD, a club of mostly rich countries.

The possibility of imminent interest-rate rises worries many. The dollar is already very strong (see chart). Thanks to the plunging price of energy, inflation is well below the Fed’s target of 2%, and has fallen in the past year. The Fed revised down its forecasts for inflation this year, though it thinks it will hit 2% by 2016, as the effect of lower energy prices wears off. In recent months American exports have been sliding.

More hawkish monetary policy will reinforce all these trends, with knock-on effects around the world. And it may hit confidence, just as the strength of America’s recovery is starting to worry some. Figures on Monday showed that manufacturing output fell by 0.2% over the last month, and car output by 3%. The Fed has little to gain from tough monetary policy, and a lot to lose.

Higher interest rates could have effects all around the world. Between 2009 and 2014 dollar credit to emerging-market economies—loans by banks and bonds issued by companies—almost doubled, from $1.7 trillion to $3.3 trillion. In 2013, when the Fed hinted that it was going to stop its quantitative-easing programme, investors pulled money out of emerging markets in the expectation of higher interest rates in America. Countries like Turkey had to jack up interest rates to stop capital flight, which hit their economies hard. In a speech yesterday, Christine Lagarde, the chief of the International Monetary Fund, warned about the possibility of another “taper tantrum”. So far, Ms Lagarde will be happy: following the press conference, emerging-market currencies did not plunge again the dollar. But if rates rise fast, that may all fall apart.

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