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Fed Minutes Show Bankers' Plan for Tighter Money

NEW YORK (TheStreet) -- If a "gaffe" is Washington's description of what happens when a policy maker tells the truth, the minutes of the Federal Reserve's April meeting qualify as a capital "surprise."

Everyone knows the central bankers must be thinking about how to begin to tighten money by early next year, when the Fed will completely wind down the tens of billions of dollars of monthly bond purchases it uses to keep interest rates super-low, prop up the housing market and nurture the recovery.

The surprise is that the minutes released today show them actually admitting it.

The minutes also give some idea about what the first steps toward tightening might be -- even though the minutes shed little to no light on how soon the Fed might take them.

Score one for the Fed's oft-maligned communications strategy: the minutes don't bury the lede. Though the discussion apparently happened at the end of the two-day meeting in April 29 and 30, the section titled "Discussion of Financial Normalization" is at the top of the minutes for the Federal Open Market Committee.

Early steps are likely to be more measured than simply raising the federal funds rate, the minutes say. A presentation by the central bank's staff focused instead of tactics like adjusting the interest rate the central bank pays on banks' excess reserves, fixed overnight reverse repurchase operations (meaning, short-term buying and selling of assets), and expanding the term deposit facility, which lets regulators drain money from the banking system by paying interest to banks that will deposit money with the Fed.

"The Committee's discussion of this topic was undertaken as a part of prudent planning and did not imply that normalization would begin any time soon,'' the minutes said. They described the "normalization" of monetary policy as "eventual."

These are incremental steps that would hardly represent slamming the brakes on the economy. Instead, they are the steps you'd expect from a central bank that has clearly signaled that the economy has a lot of slack in it even five years after the 2007 to 2009 recession. But the fact that they're being considered at all illustrates something else in the minutes -- the economy was improving pretty quickly in April, subtly adjusting some of the assumptions underpinning the very dovish policies of Fed Chair Janet Yellen.

As reported previously, most Open Market Committee members wrote off the winter's growth hiccup as a function of the cold weather in much of the nation. The minutes' new wrinkle was a longer discussion of how much slack is left in labor markets, where some members bucked the party line that wage growth is minimal by reporting pressures in specific industries and parts of the country. Another member, the minutes said, pointed to new research showing the path of alternate measures of labor-market health are not recovering more slowly in this recovery than in past cycles.

"A few" members hewed to research, previously done by the San Francisco Federal Reserve Bank, that argues wage growth will be delayed because pay didn't fall as much in the recession and its aftermath as it might have.  This idea was fairly conventional wisdom at the central bank as recently as January. If anything, the notion that its supporters have dwindled to "a few" is a sign that some members are watching for new evidence. But inflation is still so low that even a slightly more bullish wage outlook doesn't mean the Fed faces much of a conflict between encouraging full employment and keeping inflation under its 2% annual target, the minutes say.

Aside from worries about housing, the minutes paint a pretty bullish picture of retail sales and even business investment. There are few signs of overheating in financial markets, and labor markets are improving gradually, the Fed said.

Not fast enough that the central bank is going to use its different tools to slow any more-than-desired acceleration in growth late this year or next, mind you. But fast enough that policy makers took the opportunity today to emphasize that the tools are there waiting to be deployed.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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