Morning MoneyBeat: The Fed's Two Most Important Words

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Morning MoneyBeat US

Morning MoneyBeat: The Fed's Two Most Important Words

By Steven Russolillo

Morning MoneyBeat is the Journal's pre-market primer packed with market updates, insights and must-read news links. Send us tips, suggestions and complaints: steven.russolillo@wsj.com
MARKET SNAP: At 6:05 a.m. ET, S&P 500 futures down 0.03%. 10-Year Treasury yield higher at 2.56%. Nymex up 38 cents at $93.21. Gold $1 lower at $1238. In Europe, FTSE 100 up 0.1%, DAX down 0.2% and CAC 40 down 0.1%. In Asia, Nikkei 225 up 0.3% and Hang Seng down 0.3%.
WATCH FOR: August Retail Sales (8:30 a.m. Eastern Time): seen +0.7%; previously unchanged. August Import Prices (8:30): seen -0.9%; previously -0.2%. September Consumer Sentiment (9:55, preliminary): seen 83.0; previously 82.5. July Business Inventories (10:00): seen 0.4%; previously +0.4%. Darden Restaurants is scheduled to report quarterly results.

THE BREAKFAST BRIEFING

A debate is brewing over how the Federal Reserve will craft its language in next week's policy statement, with all eyes on two key words.
The Fed since March has said it will keep interest rates steady for a "considerable time" after its bond-buying program–known as quantitative easing–comes to an end. With QE on track to conclude next month, the question now is what exactly does a "considerable time" mean?
As the economy has improved, some market watchers think it's time for the Fed to drop that language now in order to prep Wall Street for an eventual rise in interest rates. Others think such a move next week would be premature.
No matter when it occurs, an eventual shift in language could cause turbulence in markets, with investors viewing it as a sign that the Fed is getting closer to tightening monetary policy.
The Fed's two-day meeting, which concludes Wednesday afternoon, should offer more clarity on the situation.
"At this point, we've had more conversations about the Fed in the last two weeks than in the preceding two months," Dan Greenhaus, chief strategist at BTIG, wrote to clients Thursday evening, noting the big debate centers around the "considerable time" language. "For some clients, the fuss over a few words seems overdone," he said. "At the same time, Fed language is a tool and an adjustment to that language should be something we watch."
U.S. stocks have stalled in recent days, although the Dow Jones Industrial Average still sits above 17000 and the S&P 500 lies less than 1% from its all-time high. A recent rise in U.S. bond yields has been cited as one of the factors causing stocks to struggle over the past week. The yield on the benchmark 10-year note slipped to 2.531% on Thursday, snapping a five-session string of gains.
The moves have all occurred as the debate about the Fed and interest rates has heated up.
The economy is still "several months away" from a rate increase, Mr. Greenhaus said. However he pointed out the last time the Fed started raising rates came in June 2004. Back then, the central bank changed the language in its policy statement only one month earlier.
Few expect a repeat this time around. Almost all market watchers see the Fed taking a slow and deliberate stance before its first rate increase.
But as Wall Street preps for such an event, Mr. Greenhaus says investors shouldn't expect markets to remain as calm as they have been over the past several months.
"The shift from accommodation to policy tightening will almost surely result in broad market weakness, however temporary it may be," he said. "While we've been generally bullish on equities these last few quarters, it's hard to imagine the coming four quarters will echo recent gains."
Morning MoneyBeat Daily Factoid: On this date in 2003, the country singer, songwriter and actor Johnny Cash passed away. He was 71 years old.
-By Steven Russolillo; follow him on Twitter @srussolillo.

STOCKS TO WATCH

Ulta Salon Cosmetics & Fragrances Inc. shares surged in the extended session Thursday after the beauty-products retailer topped Wall Street earnings forecasts and raised its guidance for the year. Shares of Conversant Inc. jumped 32% to $35.14 on heavy volume after Alliance Data Systems Corp. said it would buy Conversant for $35 a share.
Darden Restaurants Inc. reports earnings at 7:30 a.m ET. Analysts expect earnings per share of 33 cents on revenue of $1.59 billion.

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Salt the Pasta Water: Starboard Value's Suggestions for the Olive Garden: "When cooking pasta, use salt. And go easy on the breadsticks. Those are two of many steps Starboard Value LP said late Thursday it would take to boost the value of Darden Restaurants Inc., owner of Olive Garden, if the activist hedge fund was to win control of the entire board."
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