By Yali N’Diaye

WASHINGTON (MNI) – Members of the Federal Open Market Committee
mostly agreed that the Committee’s expectations on monetary policy were
“explicitly contingent on the evolution of the economy rather than on
the passage of any fixed amount of calendar time,” the minutes of the
March 16 policy meeting showed Tuesday.

The minutes also discussed the possible “approaches” for
communicating key elements of the exit strategy, although “participants
agreed to give further consideration to these issues at a later date.”

Overall, Committee members agreed the economic recovery was
underway and there was no emerging financial market “misalignments” or
“widespread instances of excessive risk taking.”

Yet low levels of resource utilization, “subdued” inflation trends
and stable inflation expectations continued to warrant low federal funds
rates for an extended period, which the Committee deemed “appropriate”
to reiterate.

However, the inclusion of “exceptionally low” fed funds rates for
an “extended period” does not take away the ability of the Fed to hike
rates “promptly” if needed, the Committee said, stressing its
flexibility in the “magnitude and pace” of the tightening.

“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,” the minutes read.

The report also said that a few members noted the risks of an early
start of monetary policy tightening “exceeded” those of a “later start.”

However, conversely, the FFR could stay low for “quite some time”
if economic or inflation trends justify it, the Committee said.

Interestingly, the minutes did not address discussions related to
asset sales, merely saying it was “appropriate” to indicate the schedule
for closing the Term Asset-Backed Securities Loan Facility was “being
maintained.”

The Committee otherwise pushed discussions of the key elements of
the exit strategy from quantitative easing to a “later date.”

Instead it stressed the importance of economic conditions in
determining the course of monetary policy going forward, while noting
the improvement in financial markets.

However, future “financial imbalances” could build up should the
Committee continue to indicate that economic conditions warrant
“exceptionally low” FFR for “an extended period, Kansas City Fed
President Thomas Hoenig said.

The minutes showed he continued to prefer the use of “a low level
of federal funds rate for some time.”

“Such a change in communication would provide the Committee
flexibility to begin raising rates modestly,” according to Hoenig, who
voted against the policy decision at the March 16 meeting.

“He further believed that making such an adjustment to the
Committee’s target for the federal funds rate sooner rather than later
would reduce longer-run risks to macroeconomic and financial stability
while continuing to provide needed support to the economic recovery,”
the minutes said.

The report otherwise showed that despite the recovery, participants
noted that bank lending is still contracting although credit conditions
should improve gradually “over time.”

In addition, they were concerned that continued high unemployment
would continue to drag growth.

“A number of participants pointed out that the economic recovery
could not be sustained over time without a substantial pickup in job
creation, which they still anticipated but had not yet become evident in
the data,” the minutes said.

The housing market also remains a source of concern, with
participants expecting the pace of foreclosures to remain “quite high.”

While those developments support subdued inflation trends in the
near term, a few participants “noted that the risks to inflation
expectations and the medium-term inflation outlook might be tilted to
the upside in light of the large fiscal deficits and the extraordinarily
accommodative stance of monetary policy.”

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

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