What the Fed Won't Tell You Today

By Markets Fool.com

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Federal Reserve. Source: Dan Smith.

The stock market got off to a slow start Wednesday morning, as investors nervously awaited the latest word from the Federal Reserve about how it intends to move forward on interest rates and monetary policy. As of 11 a.m. EDT, the Dow Jones Industrials were down 61 points, with all but a handful of stocks posting losses on the session. Yet, as traders look for any signs of even a minute change in the Fed's policy language in this afternoon's release, most ordinary Americans need to understand that the Fed won't tell them the most important aspects of future monetary policy and its impact on the economy.

Much ado about patience
Most of the attention to the Fed's statement later today is focusing on whether it will continue to include language about being "patient in beginning to normalize the stance of monetary policy." Based on Fed chair Janet Yellen's testimony before Congress, most Fed watchers believe that as long as the word "patient" appears in the Fed's release, increases in short-term interest rates are at least three months away. If the Fed replaces the word, though, investors fear that rates could rise as soon as June.

Fed Chair Janet Yellen. Source: Federal Reserve.

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The timing of a Fed hike is important for traders in futures contracts and other securities tied to short-term interest rates, with the right call potentially producing millions in profits or losses. But in the long run, it won't make a big difference to long-term investors whether the Fed picks one month or the next to begin raising rates.

What the Fed should say -- but won't
The Fed's efforts to increase transparency have led to a rise in those who hang on the central bank's every word. Yet the Fed won't address the real issues that long-term investors need it to resolve for a very simple reason: The central bankers themselves don't know the answers.

Right now, the Fed is enjoying the best of all possible worlds. Employment prospects are rising at a pace not seen in years, with plunging unemployment combined with some signs that sluggish labor-force participation might finally start to pick up. At the same time, inflationary pressures are nonexistent, with the plunge in oil prices helping put more money in Americans' pockets to bolster the economy in other areas. To a large extent, it doesn't matter at all what the Fed does in the short run, because conditions are so good.

The problem, though, is that these perfect conditions won't last, and how the Fed will respond remains unclear. If the Fed is dead set on starting to raise rates to more normal levels, investors have little idea about the interest-rate level at which the central bank will be content to pause and reassess economic conditions. Even the definition of a "normal" target for the Federal Funds rate is hazy, with some members of the Federal Open Market Committee suggesting that, even if the economy regains its full health in the future, the Fed might stop short of the 5% level it has reached in past cycles of rising rates.

Source: Eric Chan via Flickr.

The other wildcard is whether the Fed will face international pressure to keep in line with other central banks' policies. The U.S. stands out as one of the only countries poised to go into rate-tightening mode, as Europe, Japan, and China have all taken steps to ease monetary policy and keep rates at extremely low levels. The disparity has created big imbalances in the currency and fixed-income markets, and the Fed will have to be mindful of its impact on the global economy even if its dual mandate focuses more on domestic matters.

Despite all the attention the Fed announcement will get today, don't look for it to answer the key long-range questions market watchers should have. Only a more in-depth look at economic conditions will begin to reveal the answers that long-term investors need.

The article What the Fed Won't Tell You Today originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.