Wall Street traders will be paying a "considerable" amount of attention to two words Tuesday when Federal Reserve Chairman Alan Greenspan and his fellow central bank policy-makers hold their last scheduled meeting of the year.
With short-term interest rates at their lowest level in 45 years, and the economy roaring back to life, many analysts believe the Fed will begin raising rates next year for the first time since May 2000.
But that move is at least several months away, and possibly more than a year, so the only suspense Tuesday is over what the Fed says in a statement due to be issued around 2:15 p.m. ET after Greenspan and his colleagues conclude their meeting.
Since August, central bankers have taken the unprecedented step of assuring investors in their formal statements that they intend to leave rates low for a "considerable period." In recent weeks, the most popular game among serious Fed watchers has been to guess when policy-makers will eliminate that phrase to give themselves more flexibility in its approach to monetary policy.
In a Bloomberg survey conducted last week, 12 of 22 bond dealers said they thought the wording would be eliminated Tuesday, traders said.
But that was before Friday's release of November employment figures, which showed the economy created only 57,000 new jobs last month, far fewer than the 140,000 that analysts, on average, had expected.
"On balance this report is another reason for policy-makers to stay on the sidelines and watch the economy for the next few months," said Lynn Reaser, chief economist for Banc of America Capital Management. "There is no need at this point to send a signal of tightening when that is probably not the intention."
Vince Boberski, senior economist at RBC Dain Rauscher, said the Fed "almost certainly" will retain the key phrase in its statement Tuesday because low rates remain an important insurance policy protecting the economy from a potentially devastating downward spiral of prices.
"We have to remember that fast growth in and of itself is not a bad thing from a monetary policy perspective," he said in a commentary published Monday. "Above-trend growth is only harmful if it leads to capacity constraints that in turn lead to price pressures."
And that, he said, does not seem a likely scenario. Friday's weak report on payrolls provides an important counterbalance to other, stronger economic data including figures that show the gross domestic product grew at an 8.2 percent pace in the third quarter, the fastest in two decades.
John Silvia, chief economist for Wachovia Securities, agreed that the jobs report should give the Fed reason to pause.
"We've had economic growth for almost two years now, and we're just not getting the kind of job growth you would have predicted," he said. "There is something else going on here other than the business cycle. There is some real structural change you need to deal with at a policy level."
Silvia does not expect the Fed to make any significant changes to its so-called policy directive until after Greenspan testifies to Congress in February and lays out a framework for monetary policy as the economy accelerates.
But even after the employment report there are many analysts still expecting the Fed to eliminate the "considerable period" statement from its outlook.
Northern Trust economist Asha Bangalore pointed out that November's payroll numbers were distorted by a grocery workers strike in California that resulted in a net loss of 50,000 jobs. In any case, she said, there are many indications of a "notable turnaround in labor market conditions," which would be the final missing piece of a sustainable expansion.
The unemployment rate has declined to 5.9 percent from a recent peak of 6.4 percent in June, claims for unemployment benefits have been declining and the average workweek rose by 0.1 hour last month, which economists consider a precursor to job growth.
"Although we do not believe that the FOMC is contemplating raising the federal funds rate target at either the Jan. 28 or March 16 meetings, it probably would like to eliminate the 'considerable period' language to give it more wiggle room," Bangalore said in a note.
Scott Brown, chief economist at Raymond James, is among several Fed-watchers who expect central bankers to eliminate the wording but come up with new language underscoring their intention to leave rates low.
"They have to be careful," he said. "They don't want to signal to the market that they're even thinking about raising rates at this time."
The economy has added jobs for four straight months but at an average rate of only 75,000 a month, about half what economists figure is needed just to keep up with the growth of the labor force. Even if the government's survey of business payrolls understates the impact of small business and entrepreneurs on employment, there is little doubt that the economy is adding jobs only modestly after the unprecedented job losses of the current expansion's first 20 months.
Yet few economists doubt that the economy is well into a solid recovery, with business investment finally growing fast enough to overcome a slowdown in consumer spending growth that some analysts predict for next year.
"I think there is a lot of reason to be optimistic," said Brown. "We don't really see anything that's going to derail the expansion and throw us back into recession. But there are still a lot of uncertainties."