By Steven K. Beckner

WASHINGTON (MNI) – Mirroring their slightly changed rhetoric since
their last meeting, Federal Reserve policymakers used a subtle shift of
tone in their Federal Open Market Committee statement Tuesday, but their
views did not change enough to alter a very accommodative monetary
posture.

Operating in a highly uncertain environment, the FOMC kept both
conventional and unconventional monetary policy unchanged in a very
stimulative stance.

The FOMC, in a unanimous vote, kept the federal funds rate near
zero, where it has been for more than two years, and it repeated that it
will keep that key short-term interest rate “exceptionally low … for
an extended period.”

What’s more, Chairman Ben Bernanke and his colleagues reaffirmed
their plan to keep buying Treasury bonds through mid-year to hold down
long-term rates.

Making no mention of Middle East turmoil or earthquake damage to
Japan’s important economy, the Fed said the recovery is “on a firmer
footing,” cited improving labor market conditions and desisted from
saying that progress toward its “dual mandate” objectives has been
“disappointingly slow.”

On inflation, the FOMC took a quite different approach, but came to
the same basic conclusion it reached in its January and other FOMC
meetings since the financial crisis pushed the economy into recession
more than three years ago.

While acknowledging that oil prices have “risen significantly,” the
Fed said that’s likely to be a “transitory” phenomenon and called
“underlying inflation” “subdued” — even “low” relative to the Fed’s
implicit target of 1.6% to 2.0%.

For more than a month, Bernanke and other Fed officials have been
pointing to improved economic growth and job creation, but have said the
economy remains far away from fulfilling the Fed’s dual mandate of full
employment and price stability. With a few exceptions, Fed officials
have downplayed inflation risks, although they have vowed to act to
protect price stability in a timely manner.

For example, just four days before the FOMC meeting, New York
Federal Reserve Bank President William Dudley typified the new Fed
attitude toward the balance of risks coupled an unchanged policy
preference. The FOMC vice chairman said “the economic outlook has
improved considerably in the past six months,” but added “we are still
very far away from achieving our dual mandate of maximum sustainable
employment and price stability.”

Dudley said “a stronger recovery with more rapid progress toward
our dual mandate objectives is what we have been seeking. This is
welcome and not a reason to reverse course.”

And he cautioned against being “overly optimistic about the growth
outlook,” warning on the day that a major earthquake and tsunami hit
Japan that “the coast is not completely clear. The healing process in
the aftermath of the crisis takes time and there are still several areas
of vulnerability and weakness.” And “we cannot rule out the
possibility of further shocks from abroad.”

After welcoming the 192,000 rise in February non-farm payrolls,
Dudley said, “Even if we were to generate growth of 300,000 jobs per
month, we would still likely have considerable slack in the labor market
at the end of 2012.”

As for inflation, Dudley said “there are some signs that core
inflation is now stabilizing after falling for several years” and said
the Fed must “be careful” about price pressures. But he said “both
headline and core inflation remain below levels consistent with our dual
mandate objectives.”

Dudley said “the large amount of slack in the economy has
contributed to declining inflation over the past couple of years,” and
he said, “I expect this slack to continue to dampen price pressures in
the near term.” Besides, “inflation expectations are well-anchored today
and we intend to keep it that way.”

A continuation of stronger job growth coupled with an uptrend in
price pressures could eventually lead to a firming of monetary policy,
but the FOMC did not signal that is coming soon in its latest policy
statement.

To be sure, there were some notable changes in the announcement’s
phraseology.

“Information received since the Federal Open Market Committee met
in January suggests that the economic recovery is on a firmer footing,
and overall conditions in the labor market appear to be improving
gradually,” it began. By contrast, the Jan. 26 FOMC statement said only
that “the economic recovery is continuing, though at a rate that has
been insufficient to bring about a significant improvement in labor
market conditions.”

The statement went on to say that “household spending and business
investment in equipment and software continue to expand.”

That too is stronger than the previous statement, which noted that
household spending had “picked up,” but that it “remains constrained by
high unemployment, modest income growth, lower housing wealth, and tight
credit.”

Gone is the Jan. 26 statement that “employers remain reluctant to
add to payrolls.”

Not surprisingly, the FOMC continued to call housing “depressed,”
but that is the only surviving downbeat note from the previous meeting.

The inflation language is distinctly different. Last time, the FOMC
said, “Although commodity prices have risen, longer-term inflation
expectations have remained stable, and measures of underlying inflation
have been trending downward.”

The latest statement says, “Commodity prices have risen
significantly since the summer, and concerns about global supplies of
crude oil have contributed to a sharp run-up in oil prices in recent
weeks. Nonetheless, longer-term inflation expectations have remained
stable, and measures of underlying inflation have been subdued.”

But the FOMC wasn’t finished talking about inflation. In the second
paragraph where the Committee contrasts prevailing unemployment and
inflation levels to its dual mandate, it begins by echoing the January
statement: “Currently, the unemployment rate remains elevated, and
measures of underlying inflation continue to be somewhat low, relative
to levels that the Committee judges to be consistent, over the longer
run, with its dual mandate.”

But then it takes a different tack: “The recent increases in the
prices of energy and other commodities are currently putting upward
pressure on inflation. The Committee expects these effects to be
transitory, but it will pay close attention to the evolution of
inflation and inflation expectations.”

In the FOMC’s January statement that paragraph ended with the
observation that, “Although the Committee anticipates a gradual return
to higher levels of resource utilization in a context of price
stability, progress toward its objectives has been disappointingly
slow.”

The March statement is significantly more upbeat, saying simply
that, “The Committee continues to anticipate a gradual return to higher
levels of resource utilization in a context of price stability.”

But the remainder of the statement, the meat of the announcement
which conveys the Fed’s policy intention is largely unchanged.

The FOMC will continue to target the federal funds rate between
zero and 25 basis points “for an extended period”; will continue its
program of buying $600 billion in longer term Treasury securities and
will continue reinvesting principal payments from maturing securities.

It will clearly take significantly more improvement in labor
markets and/or some uptick in inflation and/or inflation expectations to
persuade the FOMC that it’s time to withdraw some monetary
accommodation.

** Market News International Washington Bureau: 202-371-2121 **

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