Randomly Noted

The U.S. Federal Reserve missed a low-cost opportunity to reassure those investors worried about future inflation while burnishing its own reputation.

All it would have taken was omitting or changing a word or two or three.

Instead, the U.S. central bank ended a two-day meeting of its rate-setting Federal Open Market Committee with a statement barely changed from the one issued at the conclusion of the prior get-together in late September.

The rate decision, of course, was not in doubt. The federal funds rate will stay effectively near zero for some time. And there was some further and understandably reserved positive talk today about the continued pick-up in the U.S. economy.

But given that pick-up, the Fed should have taken the first baby step toward the inevitable and difficult removal of the overwhelming and emergency monetary easing that it unleashed to thwart the credit crisis and revive the economy.

It should have added some mystery to the time frame for the life of these extraordinarily low rates. Not told us when rates would be raised. Nothing of the kind. But simply made the life cycle for zero rates somewhat ambiguous.

The Fed did not. Instead it said today that “economic conditions … are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” On Sept. 23 and at earlier meetings the Fed said the same thing. The Fed should have dropped or altered this line.

In contrast to September, the Fed did today add a parenthetical clause laying out some reasons for this scenario. It spoke of “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”

It’s the last phrase the Fed has to worry about. People still believe in the Fed’s determination to “exit” its generous and necessary easing stance when the time comes. But each month into admittedly nascent economic recovery with still way too high employment gives some people pause about inflation expectations. Probably the shakiest group are investors from around the planet with the most at stake if a combination of huge fiscal deficits, a weak dollar and a bloated-balance-sheet Fed staying to long on the throttle eventually lead to higher inflation in the U.S.

The Fed generally did an admirable job helping us out of the depths of crisis from the fall of 2008. It has to start demonstrating in small ways it can be equally effective going the other way. Fed officials have started talking the exit talk. A few changed words in the statement today would have helped the slow but sure movement in that direction.

With its big balance sheet the Fed is in strange territory. Its independence is under some challenge in Congress and if it wins a role in coming regulatory reformation as a much larger bank regulator its monetary policy role will be muddied.

All these factors add weight to the argument the Fed should remind people it is over-the-top serious about squelching any chance of a future ignition of inflation. It had that chance today and did not take it.