WASHINGTON (TheStreet -- Minutes from the Federal Open Market Committee's March 16 meeting show that several committee members indicated that the phrase promising low rates for an extended period wouldn't restrict tightening if economic conditions warranted it.
According to the minutes, several members consider language promising "exceptionally low levels of the federal funds rate for an extended period" to be entirely based on economic conditions rather than tied to a specific time frame.
When Kansas City Fed President Thomas Hoenig objected to the use of the phrase, "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."
On the flip side, members also said "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 it trend inflation appeared to be declining further."
Several members also noted that the risks of early tightening were more problematic that a later tightening start date.
On inflation, members continued to believe that resource slack was effectively keeping down costs.
"Measures of gains in normal compensation had slowed, and sharp increases in productivity had pushed down producers' unit labor costs," the minutes read, adding that anecdotal information showed "wage increases were small or nonexistent and suggested that large margins of underutilized capital and labor and a highly competitive pricing environment were exerting considerable downward pressure on price adjustments."
"The fact that they said that inflation was a little lower than they expected, I took that to mean that they're more concerned about deflation than inflation. So clearly, interest rates are going to stay low for a while. They're in no rush to unwind the stimulus," said Peter Cardillo, chief market economist at Avalon Partners.
While the Committee's consensus was that inflation would be subdued in the near term, a few members expressed the belief that large fiscal deficits and accommodative monetary policy might increase inflation risks in the medium term.
Overall, members agreed that the economy continued to strengthen and that the labor market showed signs of stabilization. Both the housing market and consumer sentiment remained areas of concerns. Although consumer spending has improved, it will continue to be pressured by a difficult labor market, tight credit, restricted income growth and lower housing wealth.
Despite a general feeling that the worst of the layoffs were over, members remained concerned about companies' continued reluctance to add jobs, and several members noted that the recovery couldn't be sustained without a significant pickup in job creation.
Job growth and the health of the labor market will likely be a focal point when the committee meets April 27-28. On Friday, the Labor Department said the U.S. economy added 162,000 nonfarm payrolls in March. The unemployment rate, however, remained at 9.7%.
-- Written by Melinda Peer in New York