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The Fed may start sending a new message on rates

Just when market participants started to adjust to the Federal Reserve being on hold even longer than originally expected comes a potential twist.

When the central bank's Open Market Committee meets in a week, it may change a key piece of language in the public statement it releases afterward, according to reports, including one Tuesday in The Wall Street Journal.

The critical words are "considerable period," a phrase used to describe when the Fed will begin raising rates after the end of the monthly bond-buying program known as quantitative easing. QE, which expanded the Fed's balance sheet past the $4.5 trillion mark, ended in October.

Here's the specific language, as put forth after the October meeting:

The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

The market has been hinging on that language as a tipoff that the Fed will keep its target funds rate anchored near zero, a critical ingredient in the stock market's meteoric rise off the March 2009 financial crisis lows. The S&P 500 is up 207 percent in the bull market as companies have capitalized on a combination of QE liquidity and low rates that have allowed them to borrow on the cheap and use the money toward dividends and stock buybacks.

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In recent days, a number of Fed watchers, including those at Citigroup and LPL financial as well as banking analyst Dick Bove at Rafferty Capital Markets have pushed back their expectations for the central bank to move on rates.

But according to the Journal, Fed officials are getting close to jettisoning the "considerable time" phrase, which market participants see as indicating a rate hike is at least six months off.

"It's clearer that we're closer to getting rid of that than we were a few months ago," Fed Vice Chairman Stanley Fischer told the newspaper in a recent interview.

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Stocks sold off Tuesday, though it wasn't clear whether it was in reaction to the Journal piece, news about monetary tightening in China, or a slew of other factors that have been rattling investors' nerves.

After all, under normal circumstances the market usually shakes off the early stages of a rate-increase cycle, and with rates so low it should take a number of hikes before monetary conditions start to get truly tight in the U.S.

"Ultimately, when the Fed starts raising rates that's positive for stocks," John Canally, chief economic strategist at LPL Financial, told CNBC.com. "Equity investors should not be afraid of the Fed. They should look at why they're raising rates. If they're raising rates for the right reasons, that's good for stocks."

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