Wow … Federal Reserve Chairman Alan Greenspan merely needs to breathe wrong and the markets go nuts. On the afternoon of Wednesday, January 28, 2004, I was sitting in my office minding my own business when I decided to check the markets on the Internet. I had known that the Federal Reserve Board of Governors was due to come out of its meeting. The financial gurus across the country were in pretty much agreement that the Fed would not raise short-term interest rates.

They were right. Interest rates were left unchanged. The markets should have shrugged off the meeting as predictable, right?

Wrong.

In what seemed to be less than five minutes, the Dow Jones Industrial average went from a 60-point gain to a nearly 170-point loss. The NASDAQ was enjoying modest gains when it suddenly tumbled more than 40 points.

And interest rates -- good gravy! The yield on the ten-year Treasury bonds (which is a benchmark for mortgage rates) jumped from 4.03 to 4.25 percent.

What caused the panic? The Fed didn't make any surprise moves. Well, it seems that the jittery markets interpreted the Fed's language as a hint that a rate hike may occur sooner than expected.

Personally, I don't see why the markets panicked. Let's take a look at some of the wording of the Fed's statement.

"With inflation quite low … the committee believes that it can be patient in removing its policy accommodation." I interpret this as a statement that the Fed will not raise interest rates as long as inflation is kept at bay. But what was absent from the Fed's statement were the words, "considerable period." In all post-meeting statements since this summer, the Fed has explicitly said that it will keep rates low "for a considerable period."

Okay, folks, you tell me -- which statement indicates that the Fed is more likely to rates? The Fed will keep rates low for a considerable period or the Fed will be patient in maintaining its current low rate policy?

I think it's six one way and half a dozen the other. I mean, I interpret being "patient" as refraining from any kind of impetuous or knee-jerk move. It seems to me that the Fed is letting everyone know that even if a little inflation pops up, it will be "patient" in keeping its low rate policy.

How does that differ from keeping rates low for "a considerable period"? A considerable period can mean a lot of things. It's a pretty relative term.

Here's what I think: Regardless of the wording in Chairman Greenspan's statements, a "considerable period" might mean between now and the time inflation rears its head. Who knows? That could happen when this month's price reports are announced.

By the same token, I bet Chairman Greenspan will be plenty patient ... as long as inflation is kept at bay.

But my opinion doesn't matter. The markets heard a pending rate hike. All I heard was "No Inflation equals No Rate Hike." Stay tuned.

Published: January 29, 2004

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.