* Central bank could adjust interest rate guidance in Sept.
* Economic data better, anxiety among policymakers growing
* Yellen nods to less dovish views on labor market
By Jonathan Spicer, Michael Flaherty and Howard Schneider
JACKSON HOLE, Wyo., Aug 24 Pressure is building
within the Federal Reserve for officials to move as early as
next month to more clearly acknowledge improvements in the U.S.
economy and lay the groundwork for the central bank's first
interest rate hike in nearly a decade.
According to some U.S. central bankers and their close
advisers, signs of economic resilience and growing anxiety about
the risks of holding rates too low for too long have set the
stage for an intense debate over rewriting their policy
It is uncertain whether officials will use their upcoming
meeting on Sept. 16 and 17 to scrap key parts of the language
they have been using to keep rate-hike expectations at bay, but
if they do not, October looks like a good bet.
"Some shift of language is on the table, and should be on
the table in the coming meetings," Atlanta Federal Reserve Bank
President Dennis Lockhart, a policy centrist, said in an
interview. While a handful of officials have argued for prompt
changes, Lockhart said he thinks September "is still early."
Adding, dropping or adjusting even a few words in the Fed's
post-meeting statement is a potentially treacherous task. A
miscommunication by the world's most powerful central bank could
shock financial markets globally and, in a worst case, reverse
the economic recovery it seeks to foster.
At issue is a 5-month old pledge from the Fed to keep
benchmark rates near zero for a "considerable time" after it
shelves an asset-purchase program in October.
Another line that has drawn internal objections is the
month-old statement that "significant" slack remains in the
labor market, a suggestion that not even strong job growth and a
further drop in unemployment will prompt a tightening of policy
any time soon.
"The language puts us in a box that I think is not a good
box to be in," Philadelphia Fed President Charles Plosser told
Reuters on the sidelines of the central bank's annual Jackson
Plosser dissented against the "considerable time" line at
the Fed's last meeting in late July. Like fellow hawks at the
central bank, he said he prefers "very simple, data-dependent"
guidance that avoids timelines or calendar dates.
WARY EYE ON GLOBAL GROWTH
Aside from an unpredictable market reaction, Fed Chair Janet
Yellen will have to contend with a potentially uncooperative
world economy that could upend U.S. economic progress.
During the Jackson Hole meetings, central bankers from
England, Europe and Japan described how their economies were
healing more slowly than expected - and in Europe's case, at
risk of slipping backward.
Worse than a bout of inflation, Yellen does not want to
raise rates only to have to shift gears if the economy slows.
That means any change in language is not likely to mean rate
hikes will come earlier or occur faster than currently
As it stands, investors and the core of Fed policymakers
expect to hold off raising rates until the middle of next year.
But a rhetorical shift would mark the start of a delicate
transition as the Fed plans how to close the book gently on six
years of near-zero interest rates. At some point, it needs to
shed key phrases it has used to describe the slack in the
economy and prepare markets for the return to a more normal
In an address to fellow policymakers on Friday, Yellen gave
more voice than usual to the possibility that economic
conditions may tighten faster than expected. Coupled with
increasingly loud calls from Fed hawks for a shift in course,
her remarks suggested change was afoot.
"With a few exceptions, the data are mostly coming in to
push everybody in a slightly more hawkish range," said former
Fed Vice Chairman Alan Blinder, a professor at Princeton
University who attended the conference. "The whole range is
moving, so the midpoint is moving, and (Yellen) is moving."
Minutes from the Fed's last meeting in July revealed that
several participants disagreed with parts of the statement,
including the description of the degree of labor market slack
and the likely timing of a rate hike. Those voices are only
likely to get louder.
In her speech on Friday, Yellen nodded to the possible need
to shift the tone soon.
"With the economy getting closer to our objectives, the
FOMC's emphasis is naturally shifting to questions about the
degree of remaining slack," she said of the Fed's policy-setting
committee. "And thereby to the question of under what conditions
we should begin dialing back our extraordinary accommodation."
(Editing by Peter Cooney)