The Federal Reserve is about to provide a little more insight into how long an extended period of time might be.
The U.S. central bank, has been repeating that "extended period" phrase since March to signal that it intends to keep its benchmark short-term interest rate near zero for the foreseeable future.
With the U.S. economy now growing again, there is considerable debate about how far that horizon stretches.
After its last policy-setting meeting in early November, the Fed spelled out more clearly the economic conditions that it thought justified ultra-low rates — namely high unemployment and subdued inflation trends and expectations.
On Tuesday, the Fed will release minutes from that meeting, offering a glimpse into its closed-door discussions that may provide more clues about when rates will go up.
A recent Reuters poll of economists found they expect the Fed to hold interest rates steady until the third quarter of 2010, even though the economy is likely to keep growing.
"We think the Fed will want to see several quarters of strong growth and a falling unemployment rate before it is willing to raise rates," said Barclays Capital economist Dean Maki, who expects modest tightening starting in September.
The Fed got three months of above-average growth in the third quarter, although revised figures coming on Tuesday are expected to show the pace was not quite as peppy as the 3.5 percent annual rate that was initially reported.
Revised figures for Britain's economy, slated for release on Wednesday, are expected to show its third-quarter contraction was not as deep as first thought, although the fact the economy was still shrinking has kept pressure on the Bank of England to do more to spur activity.
As for U.S. unemployment, that stands at a 26-year peak of 10.2 percent and is widely expected to stay abnormally high at least through 2010.
The Fed itself has predicted the jobless rate will remain above normal at least through 2011. Tuesday's minutes will include updated forecasts for economic growth and employment, and may show the central bank taking an even gloomier view.
Its June forecasts pegged unemployment in the range of 9.8 percent to 10.1 percent for 2009, but the actual figure has already exceeded that. Its 2010 forecast for 9.5 percent to 9.8 percent unemployment may also be nudged higher. (For the Fed's June forecasts, see [FED/FCASTS])
CHILLING WAKE-UP CALL
Some private economists think this recession has done even deeper structural damage to the job market, pushing the longer-run "normal" level of unemployment to somewhere around 6 percent rather than the 5 percent range that Fed officials had thought.
Indeed, the Fed's June forecasts show at least one of its policy-setting committee members thinks longer-run unemployment may now be 6 percent. If more officials have shifted to that view, the Fed's longer-run forecast could get bumped up.
For financial markets, a Fed promising cheap money indefinitely has helped to lift stock markets and steepen the yield curve, making lending more profitable for banks.
But global markets developed a case of the jitters last week after eight months of relative calm, reflecting a bit of uncertainty about the health of the economy and what that might mean for central banks' ultra-loose policies.
Lena Komileva, an economist with Tullett Prebon in London, thinks the recent market unrest may be an early warning of worse to come next year.
The Fed and its counterparts in Europe and elsewhere have cut interest rates to record lows and poured trillions of dollars into special lending programs to try to prop up the economy. Komileva said that succeeded in turning investor attention away from the sort of depression scenarios that were prevalent last year, but the effects may be temporary.
Reports last week showing the U.S. housing market still suffering from soaring defaults "made for a chilling wake-up call," she said. Investors responded by pulling money out of assets seen as risky.
If the recent wobbles are showing markets had assumed a healthier and speedier economic recovery than what has materialized, central banks will have to decide whether they can provide more assistance without sowing the seeds of future problems such as runaway inflation.
"In financial (market) valuations, the global economy now looks a bit too perfect," she said. "It appears that the effects of central banks'… anesthetic for global financial risks are beginning to wear off."
