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What the Fed's 'extended period' on low interest rates might really mean

The Federal Reserve's promise to keep short-term interest rates low for an "extended period" has become boilerplate in its post-meeting statements.

That, in turn, has comforted financial markets, which obviously aren't in any hurry to see the Fed tighten the easy-money spigot.

But the minutes of the Fed's March 16 Open Market Committee meeting, released Tuesday by the central bank, included a discussion of what "extended period" really means -- or might mean.

The upshot: No one should assume that the "extended period" wording in a meeting statement indicates that the Fed is signaling at least several more months of rock-bottom interest rates. Policymakers might act much more quickly to raise rates, depending on the economic backdrop.

From the meeting minutes:

Nearly all members judged that it was appropriate to reiterate the expectation that economic conditions -- including low levels of resource utilization, subdued inflation trends, and stable inflation expectations -- were likely to warrant exceptionally low levels of the federal funds rate for an extended period, but one member believed that communicating such an expectation would create conditions that could lead to financial imbalances.

A number of members noted that the committee's expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.

Consequently, such forward guidance would not limit the committee's ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably; conversely, the duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further.

The Fed also indicated that some committee members still were more concerned about raising rates too soon than about being too late:

A few members also noted that at the current juncture the risks of an early start to policy tightening exceeded those associated with a later start, because the committee could be flexible in adjusting the magnitude and pace of tightening in response to evolving economic circumstances; in contrast, its capacity for providing further stimulus through conventional monetary policy easing continued to be constrained by the effective lower bound on the federal funds rate.

My colleague Don Lee has more on the meeting minutes here.

-- Tom Petruno
 
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