WASHINGTON — When Loretta Mester, president of the Federal Reserve Bank of Cleveland, took queries from a local audience Nov. 13, it didn’t take long for someone to pose the question that the investment world now obsesses over.
“What does ‘gradual’ mean?” asked Craig Evers, an economist at hedge fund firm Brevan Howard Inc.
The answer, when it comes, will set a course for financial markets worldwide. Barring an upset, the Fed is expected to raise its benchmark interest rate in December in what might be the most anticipated policy move in its 100-year history.
Because investors think they know when the initial hike is coming, they’ve switched focus to the pace of subsequent increases. And “gradual” is the clue the Fed keeps providing.
But what does the word mean in Fedspeak? Janet Yellen and her colleagues aren’t really saying, and the science of semantics can offer only limited insight.
“It only means something when used in a given situation and even then can be quite vague,” said Molly Diesing of Cornell University’s department of linguistics.
In other words, it can mean pretty much whatever Yellen and her colleagues want it to mean — and that’s probably no accident.
“From the Fed’s point of view, it’s an ideal phrase,” said Lee Ferridge, head of macro strategy at State Street Corp.’s asset management unit in Boston. “It tells you they’re not going to hike at every meeting, but it doesn’t commit them to any sort of pace.”
Although it’s attracting more attention now, the Fed has been making use of “gradual” for more than two years. In its quarterly Summary of Economic Projections, the Fed has repeatedly said policymakers expect to raise rates “relatively gradually” or “fairly gradually.”
Yellen has used versions of the term in public comments since at least March. She also has been particular about what “gradual” doesn’t mean.
There is “no plan to follow any type of mechanical approach to raising the federal funds rate,” she said after the June meeting.
Under Alan Greenspan, the Fed hiked by 0.25 percentage points at 17 consecutive sessions, from June 2004 to June 2006 — an increase it usually described as “measured.”
But that created too much predictability, and encouraged too much risk-taking by investors, according to a now-widespread view — one reason the Fed generally avoids the term now.
More recently, investors have wondered how long a period was “considerable time.” That’s how long the Fed, beginning in September 2012, pledged not to raise rates while it waited for the economy to heal.
In December 2014 the Fed moved on, now pledging to be “patient.” Just when Fed-watchers were beginning to figure out what that meant, the word was dropped in March 2015. Yellen’s gloss on the move: “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient.”
