If Fed loses 'patience,' that could mean June rate hike

There is much speculation — and clear anticipation — that the Federal Reserve will alter the language it uses to establish the timeframe for a possible rate hike later this year.

The word in question is "patient."

Janet Yellen
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Janet Yellen

The Fed has said it will remain "patient" in describing when it will begin normalizing policy, a word that is expected to disappear Wednesday when the Fed releases its decision on interest rates.

The removal of that key word, according to many Fed watchers, presumably opens the door to a rate hike as early as June. That comes from Fed Chair Janet Yellen herself, who suggested that any change in language would precede a rate hike by a few as two meetings … hence the calculation of a June hike.

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Now, there are a few reasons that the Fed should begin the normalization process:

  • A move toward normalization will let the Fed know what the markets's reaction function will be. Will there be another so-called "taper tantrum?" or will the markets just accept the move toward higher rates as evidence the economy is on firmer footing?
  • The narrowest measure of unemployment has fallen to a pre-recession low of 5.5 percent.
  • The economy, excluding the "soft patch" that reappeared in the first quarter, has generally been growing slightly above trend.

Having said that, impatience may be a virtue here still, as other key metrics of economic stability do not yet warrant a rate hike.

Inflation is still falling away from the Fed's 2-percent target.

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The dollar, which has rallied 20 percent since last June, is doing the Fed's tightening work for it. A 20-percent rally in the dollar has the growth-dampening effect of a full percentage point increase in interest rates.

The dollar's surge has cut into export growth, and reduced corporate profits, and will likely continue to do so, as the dollar is showing scant signs of retreating in a meaningful way. Overseas economies are still a drag on global growth while housing remains a drag domestic growth.

The economy is not normal, hence policy should not yet be normalized.

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Until the economy is firing on all cylinders, inflation is moving back toward target, and everyone experiences the benefits of improvements in the economy, the Fed can easily afford to remain patient, but it appears too many people lack patience with the Fed and would rather see rates start moving up than the economy complete its recovery.

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. Follow him on Twitter @rinsana.