Will the Fed say buh-bye to 'considerable time?'

Fed keeps 'considerable time': Pro
Fed keeps 'considerable time': Pro   

"O, what men dare do! What men may do! What men daily
do, not knowing what they do!"

- "Much Ado About Nothing"

Shakespeare seemed to have some insights on how markets have failed to understand monetary policy these days, with daily pronouncements from Federal Reserve watchers, who speak with great certainty about the central bank's next moves. Over the course of the last several years, most have been wrong, expecting the Fed to raise interest rates in an attempt to rein in phantom inflation, not only "not knowing what they do," but not understanding what they say.

It appears now that we are at a critical juncture (aren't we always?) in Fed policy-making. There has been much ado about two words in the Fed's statement and whether or not those two little words will remain in the Fed's description of monetary policy going forward when that statement is released Wednesday afternoon.

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Will the Fed remove "considerable time" from the description of how long they intend to keep short-term interest rates at the so-called "zero bound?" The removal of those words would, to many observers, signal the Fed's intention to start raising interest rates sometime in the middle of 2015, assuming the economy continues to gather momentum, unemployment continues to fall, and inflation begins to move toward the Fed's intended target of 2 percent, the last of which is least likely.

Janet Yellen
Getty Images
Janet Yellen

Given the crash in commodities, slowing global growth, turmoil in emerging markets and real troubles in oil-dependent nations, the Fed may surprise the world by maintaining the verbiage that has kept a floor under asset prices and assured markets that no influences, inside, or outside, the U.S. will keep the Fed from meeting its dual mandate of maximum sustainable employment and stable prices, which today means gently rising inflation.

I have been of the mind that given a variety of external risks posed to the U.S. economy, the Fed will, despite its usual, and sole, focus on domestic variables, wait to raise interest rates until policy makers are certain that ill winds that blow from overseas will not threaten the domestic expansion. It is typically not within the Fed's mandate to concern itself with external factors, or exogenous events, but it would be foolish not to do so now.

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While it is true that the plunge in energy prices will provide a tailwind to the U.S. economy going forward, as disposable income gets a boost from cheaper gas, heating oil and natural gas prices, it is also true that the precipitous decline in the prices of energy products is creating a potential crisis in the high-yield bond market, which has been used to finance speculative energy projects that may soon prove quite unprofitable. The plunge in prices is already leading to a cutback in capital-spending plans among energy companies who fear falling prices will lead to sizable losses on marginal wells. That, in turn, could lead to fewer jobs created in the energy patch, one of the few areas in the economy that offers high-paying, value-added jobs. The Fed cannot look at falling oil prices only as a tailwind. Some headwinds will be whipped up as well.

A mini-panic in high yield, if it hasn't begun already, could emerge as a serious market disruption, like the collapse of Long-Term Capital Management in 1998, the Asian currency crisis in 1997, or the Mexican Peso crisis in 1994. Overnight, Russia raised its key lending rate from 10.5 percent to a whopping 17 percent in an effort to halt the ruble's slide. This, no doubt, can shove Russia's already teetering economy into recession, or worse.

Indeed, we are witnessing a crisis in emerging market currencies which are plunging, thanks to a rising dollar, expectations for tighter monetary policy in the U.S., and the crash in crude.

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It would be wise for the Fed not to send signals to the market that might have to be taken back, if the commodity crash complicates the outlook for global and, by extension, domestic economic growth.

There is a god chance "considerable time" is on its way out, but, hopefully, the Fed will offer another conditional scenario in which it could forestall raising interest rates if a crisis of confidence should rattle domestic and global markets.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He also editor of "Insana's Market Intellgence," available at Marketfy.com. He delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at roninsana.com. Follow him on Twitter @rinsana.