Ever since it uttered the words “considerable period” in August, the Federal Reserve knew that it would have to take them back someday. On Wednesday, the Fed’s rate-setting committee did.

Markets magnified the slight change in wording into a sharp increase in long-term interest rates, even as the Fed kept short-term rates at a four-decade low.

The Fed’s rate-setting Open Market Committee left short-term interest rates alone, as expected. The federal funds rate, which banks charge one another for overnight loans, will remain 1 percent. The prime rate, upon which many other consumer rates are based, will remain 4 percent.

All that was secondary to the change in wording. In four meetings since August, the Fed had said that it could keep rates low “for a considerable period.” This time, the Fed said it could be “patient” in raising rates. On the surface, the meanings are just about the same, but investors inferred that the Fed was hinting that within a few months it will suggest that it might eventually raise rates.

That’s not a signal that a rate increase is imminent, but investors were surprised by the change in wording. The yield on the 10-year Treasury note spiked upward from about 4.06 percent to about 4.18 percent within minutes.

“With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation,” the Fed said. The words “policy accommodation” are Fedspeak for low rates.

Joel Naroff, economist and principal of Naroff Economic Advisors in Holland, Pa., says, “The idea is that ‘patience’ means that they’re not going to move immediately, even if they’re seeing some stronger numbers.”

But, Naroff continues, what if the economy does produce some strong numbers — 6 percent growth in gross domestic product in the fourth quarter of 2003, and 200,000 or more jobs created in January? Such bouyant economic news wouldn’t be enough to persuade the Fed to raise rates at its next meeting, March 16. But two consecutive quarters of strong economic reports could tip rates higher in May or, more likely, June.

Here’s how the market perceives the Fed’s changed wording, Naroff says: “Considerable period” means that higher rates are a long way off, even with evidence of job creation in January and a surging economy in the final three months of 2003. “Patient” means that the Fed will be quicker to pull the interest-rate trigger if it sees signs that the economy is rebounding.

“Patient” means a rate increase in March is out. “It puts May a little in play and June clearly in play,” Naroff says. “It will take things like strong growth and strong labor market growth, I think, and some indication that the really low inflation rates are ending.”

The rate-setting committee said the economy is “expanding briskly” and that, although “new hiring remains subdued, other indicators suggest an improvement in the labor market.” It didn’t describe what those other indicators were.

Rates on many consumer loans are tied to the prime rate, and their rates will stay about the same. Many vehicle loans, home equity lines of credit and credit cards move up and down with the prime rate.

Long-term mortgage rates, such as those for 15- and 30-year fixed home loans, do not directly follow the Fed’s actions on short-term interest rates. In fact, the last time the Fed cut the overnight rate, mortgage rates shot up that afternoon and kept rising for a few days. Long-term mortgage rates react to broad influences, such as Wall Street’s long-term expectations about the economy, and other nations’ efforts to stabilize their currencies relative to the dollar.

Economists, investors, business owners and workers (both employed and unemployed) seem to have widely divergent views about the state of the economy. Like many mainstream economists, members of the Fed’s rate-setting committee have been expecting the economy to take off, launched by the twin incentives of low interest rates and increased government spending accompanied by lower taxes.

The Fed hasn’t received the response it wanted: fuller employment and slightly higher inflation. Members of the Open Market Committee have made it clear that they don’t plan to raise short-term rates until they see higher inflation. That’s in contrast to the committee’s past practice, in which it would raise rates to try to prevent inflation.

While the Fed takes care not to set an explicit target for inflation, most people believe the central bankers want to keep inflation between 1 percent and 2 percent. In 2003, the Consumer Price Index was 1.1 percent with the volatile food and energy sectors stripped out. That is a bit too close for comfort for the Fed, which would like to bump up that inflation rate a tad.

“Certainly, the policy stance we have today is historically unusual,” Fed governor Ben Bernanke said in a speech early this month. “More than two years after the recession trough, and following several quarters of strong growth, the historically normal pattern would be for the Fed to be well into the process of tightening policy by now.”

He explained that the Fed has kept its foot on the accelerator because of low inflation, rapidly rising worker productivity and the “persistent softness of the labor market” — and that the Fed will not hesitate to jack up rates when necessary.

It’s just not necessary now, in the Fed’s judgment.

The rate-setting committee meets eight times a year. The next meeting is scheduled for March 16.

— Updated: Jan. 28, 2004