By Steven K. Beckner

SANTA FE, New Mexico (MNI) – Minutes of the Federal Reserve’s March
16 Federal Open Market Committee meeting leave wide open the question of
just how long the FOMC’s “extended period” of “exceptionally low”
short-term interest rates might prove to be.

The minutes make two things clear — that the appropriate duration
of “extended period” is a matter of debate within the FOMC and that it
is subject to change depending on how the economy evolves.

In short, “extended period” is a flexible and symmetrical concept,
subject to being either shortened or elongated depending on what happens
to economic growth, employment, inflation and inflation expectations.

Right now, notwithstanding moderately encouraging March job
figures, there is still considerable uncertainty about the economy and
considerable concern that the unemployment rate will be very slow to
come down to acceptable levels. There is also concern about potential
further disinflation.

For this reason, as MNI reported Monday, there are officials who
are prepared to wait until next year before raising the federal funds
rate or otherwise tightening monetary policy.

On March 16, Fed Chairman Ben Bernanke and his fellow FOMC members
left the key federal funds rate target in the zero to 25 basis point
range, where it’s been since December 2008.

And they “continue(d) to anticipate that economic conditions,
including low rates of resource utilization, subdued inflation trends,
and stable inflation expectations, are likely to warrant exceptionally
low levels of the federal funds rate for an extended period.”

All but Kansas City Federal Reserve Bank President Thomas Hoenig
favored repeating that familiar boilerplate.

But just what does the phrase “extended period” mean?

It is clear from the minutes that there were divergences of
opinion. It also seems clear that it will take some doing to build a
consensus for changing that language.

What the minues do, however, is to add further clarity to the
language. At the Nov. 4, 2009 meeting, the FOMC amplified language by
adding the conditions upon which “extended period” depends — low
resource use and so forth.

Now, the minutes are telling us that “extended period” is elastic
in a symmetrical way. It could be shorter or longer depending on the
circumstances.

“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,” say the
minutes. “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.”

“(C)onversely, 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 minutes add.

The minutes also reflect the fact that, for every official, such as
Richmond Fed President Jeffrey Lacker, who would like to tighten sooner
rather than later, there are at least as many policymakers who are in no
hurry whatsoever to begin the tightening process:

“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.”

This business about “extended period” being data dependent, not a
fixed calendar time, is not really new by the way. Fed officials had
been making similar remarks before the minutes were released.

–MORE–
[TOPICS: M$U$$$,M$$BR$,MMUFE$]