After painting itself into a corner, the Federal Reserve is pausing to let the paint dry.

The Fed's rate-setting Open Market Committee left short-term rates alone, as expected. The target for the federal funds rate, which banks charge one another for overnight loans, will remain at 1 percent. The prime rate, which banks charge to their best customers, will remain at 4 percent.

Some types of consumer loans are based on the prime rate, and rates on those aren't likely to change much, if at all. Among them are vehicle loans, home equity lines of credit and some credit cards.

This summer, the Fed painted itself into a corner using a brush called the FOMC statement, loaded with a bright-hued phrase: "for a considerable period." Someday the Fed will have to take back those four words, and bond investors might react by raising long-term rates -- even if they do so before the Fed wants them to.

After every meeting, the rate-setting committee issues the FOMC statement -- a brief document, usually four paragraphs long, explaining the Fed's action, its assessment of the current economy, and an appraisal of what the future holds for the economy.

This time, the FOMC statement said, in part: "The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

The deflation risk
In this latest FOMC statement, and in the previous two statements, the Fed is acknowledging a risk that inflation could fall so low that the economy could stall. To keep inflation from falling too much, the Fed has kept short-term rates at a 45-year low. The Fed calls these low rates a "policy accommodation" that can be maintained "for a considerable period."

Economists and investors believe that the "considerable period" will end next year -- possibly in the spring, more likely in the summer or fall. Some think it won't end until 2005. Whenever the period ends, it will be marked by an increase in short-term rates as a reaction to inflation.

Higher mortgage rates
The Fed probably will remove the phrase "for a considerable period" a few months before it raises short-term rates. Naturally, investors will take that as a strong hint of an impending rate increase. The immediate result could be higher long-term rates for 15- and 30-year mortgages and for corporate bonds.

Members of the rate-setting committee realize that, and will use it to their advantage, says Ken Mayland, an economist and president of Clearview Economics in Pepper Pike, Ohio.

"At some point, they're going to change that phraseology, and that will be part of the process," he says. "The Fed will never want, out of the blue, to raise rates. They're going to want to prepare the markets for that eventuality."

Removing "considerable period" from the FOMC statement "will be the Fed's not-so-subtle way of telling us that a policy change will be forthcoming," Mayland says. "So this is all part of the tool kit that the Fed has. Jawboning is an important part of the tool kit, just like the actual policy actions."

Improving economy
The economic outlook has improved since the last Fed rate-policy meeting, on Sept. 16. The most important development was the surprising employment report for September. Nonfarm payrolls grew by 57,000 jobs in September -- the first increase in jobs since January. One month of positive news does not make a trend, but the Fed had to acknowledge the rosier economic picture.

"The evidence accumulated over the intermeeting period confirms that spending is firming, and the labor market appears to be stabilizing," the Fed's statement read. "Business pricing power and increases in core consumer prices remain muted."

Most economists say it will take months of strong economic growth before inflation is reborn, and the Fed clearly doesn't plan to raise interest rates until it sees evidence of rising inflation.

The September unemployment rate was 6.1 percent, and inflation is unlikely to become a factor until the unemployment rate drops below 5 percent. Similarly, capacity utilization -- a measure of what the economy could produce if offices and factories operated at full capacity -- was a shade less than 75 percent in September. It would have to climb to 80 percent or higher before inflation becomes a worry.