The difference between a "dovish" post-meeting statement and a "hawkish" one may be explained by a single word change since the Fed uses a peculiar language.

The difference between a "dovish" post-meeting statement and a "hawkish" one may be explained by a single word change since the Fed uses a peculiar language. When the central bank announces its decision later on in the day, investors seeking evidence of a "pause" in interest-rate rises would do well to keep a careful watch on any adjustments to crucial words.

The key change following the Fed's most recent meeting was, of course, that officials appeared to leave the door open to a potential stop to increases—not immediately, but at some time in the future.

The Fed's officials will let everyone know whether they're really planning to pause by slightly changing that wording.

The belief that the Fed is lying has been a common error made by investors during the last year. Although there is a lot of bizarre, coded language used at the modern Fed, policymakers typically express their thoughts in plain language. Jerome Powell, the current chair, has picked up the communications mantle from his predecessors. If Powell and his co-workers think it's time to stop raising rates, they would likely declare as much in the meeting statement that is issued along with the rate decision.

The language used by officials in such announcements adheres to a tried-and-true communication formula that Ben Bernanke (previous Fed Chair) employed before the 2006 halt. Those in charge of making policy declared in December 2005 that "some further measured policy firming [was] likely to be needed." Then, in January 2006, they abandoned the word "likely" in favour of the phrase "policy firming may be needed."

Investors should anticipate completely noncommittal speech regarding future rate rises if the Fed really does decide to take a break. The March statement that "some additional policy firming may be appropriate" should change to something even softer.

Policymakers occasionally fail to notice when the Fed achieves its peak rates. The Fed issued the final hike of that cycle in December 2018 while maintaining the statement on the hawkish side.

There is no doubt that this year's battle against inflation is unique in the era of the open Fed, and there is no assurance that policymakers will stick to the same plan. The main point to remember is that investors shouldn't have to wait until Chair Powell's news conference to assess the future course of policy. Policymakers will very probably inform us right away if the Fed is in fact halting, although in their own peculiar little style.

(bloomberg.com, federalreserve.gov)