RENEE MONTAGNE, HOST:
Let's take a quick glance now at the state of the world economy. The price of oil is plunging and with it Russia's ruble, which could collapse. That is already sending financial markets into turmoil in other parts of the world - all this while the U.S. economy continues to recover. U.S. Federal Reserve officials wrap up a meeting today in Washington D.C. And to find out what they're likely to do and say in the face of these and other challenges, we turn - as we often do - to David Wessel. He's director of the Hutchins Center at the Brookings Institution and a contributing correspondent to The Wall Street Journal. Good morning.
DAVID WESSEL: Good morning, Renee.
MONTAGNE: What are you expecting from the Fed today?
WESSEL: Well, the Fed isn't going to do anything today. It's ended its aggressive bond buying - what's called quantitative easing. It's going to continue to hold short-term interest rates near zero where they've been for six years now. The big question is what the Fed is going to say at its end-of-meeting statement and what Janet Yellen, the chair, will say in her press conference this afternoon.
Now, the Fed has been promising to keep interest rates at zero for (quote), "a considerable time." But it's widely expected today to drop that phrase, a signal that it's inching towards the day when it'll begin raising interest rates, a move markets now expect to come sometime in the middle of 2015.
MONTAGNE: So dropping the phrase a considerable time, meaning - small words, but a few words for the Federal Reserve can mean a lot. How much difference would it make in any event, as you predict, that they keep interest rates unchanged?
WESSEL: Well, it'll make a big difference that they change their language. Because financial markets, stocks, long-term bonds, currencies all move on expectations of what the Fed's going to do in the future as investors and traders place their bets. So dropping that phrase and replacing it with some other will be seen as confirming expectations that the Fed anticipates the U.S. economy will be strong enough next year to handle a gradual increase in interest rates.
Now, there's a chance the Fed will hold off on the wording change because there's so much trouble outside the United States. But because markets and investors around the world have become so accustomed to very low interest rates, the Fed knows that its first rate increase is likely to be - well, shall we say - unsettling. So it wants to be sure it's warned loudly and repeatedly that rates are going to rise before it actually does so. And that's why the wording is so important.
MONTAGNE: How confident are Fed officials that the U.S. economy is going to be healthy enough to raise rates?
WESSEL: Well, although the U.S. economy has not fully recovered from this devastating recession, it is clearly getting better. Some Fed officials are itching to raise rates soon. Now that the unemployment rate has come down, they no longer see the need for this really extraordinary monetary medicine. But others argue for waiting until the economy and the job market can recover more fully, especially since there's so few signs that inflation is rising.
Now, I'd say until a few weeks ago, the bulk of Fed officials were pretty confident that by the second or third quarter of next year, they'd be ready to raise rates. But as you point out, the past several days have clouded the picture considerably. Falling oil prices are very good for the U.S. economy overall, but it's been so sharp it's producing some anxiety that maybe it's a signal that the rest of the world is really a lot sicker than we thought and that could spill over here. So I think the Fed will choose its words very carefully today to preserve some maneuvering room on the timing of that next raise increase.
MONTAGNE: And David, you mentioned that there are a few signs of inflation out there. Is that a reason the Fed would hold on - rather hold off on raising rates?
WESSEL: It could be. Inflation remains below the Fed's 2 percent target. All around the world, there's less inflation than the Fed or the European Central Bank or the Bank of Japan would like. In fact, the world's a little too close to deflation or falling prices for their taste. And falling aisle prices, while largely good, could unsettle consumers and investors and raised doubts about whether the central banks are really going to be able to get inflation back up to their 2 percent target. So I think that's just one of the issues that's likely to come up in Janet Yellen's press conference this afternoon, where she has a chance to really explain what they're thinking.
MONTAGNE: David, thanks very much.
WESSEL: You're welcome.
MONTAGNE: David Wessel is director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, and he's a contributing correspondent to The Wall Street Journal. Transcript provided by NPR, Copyright NPR.