When Loretta Mester, president of the Federal Reserve Bank of Cleveland, took queries from a local audience on Nov. 13, it didn’t take long for someone to pose the question that now obsesses the investment world.
“What does ‘gradual’ mean?” asked Craig Evers, an economist at hedge fund firm Brevan Howard Inc.
The answer, when it eventually 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 may be the most anticipated policy move in its 100-year history. Because investors now 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 -- from the Latin “gradus,” or step -- mean in Fedspeak? Janet Yellen and her colleagues aren’t really saying, and the science of semantics can only offer limited insight.
Quite Vague
“It only means something when used in a given situation and even then can be quite vague,” said Molly Diesing, director of graduate studies at 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.”
Though 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, or SEPs, the Fed has repeatedly said policy makers expect to raise rates “relatively gradually” or “fairly gradually.”
Yellen has used versions of the term in public comments since at least March. She’s also been particular about what “gradual” doesn’t mean.