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The minutes of the Oct. 28 meeting of the

Federal Open Market Committee

were released at 2 p.m. EST today, igniting gains in both stocks and bonds. Investors seem to be encouraged by indications that the Fed would keep interest rates low well into 2005, owing to high levels of excess capacity. The minutes also appeared to define the phrase "considerable period," which has been included in statements referring to how long the Fed believes it can maintain an accommodative stance on monetary policy.

Here are the two main excerpts from the minutes of the

Fed's

meeting that spurred a large jump in Treasuries and helped to catapult the

TheStreet Recommends

Dow Jones Industrial Average

above 10,000:

On Employment

"Looking ahead, members generally anticipated that an economic performance in line with their expectations would not entirely eliminate currently large margins of unemployed labor and other resources until perhaps the latter part of 2005 or even later."

On Inflation

"In their review of the outlook for inflation, members emphasized that the prospects for persisting slack in labor and other resources in combination with substantial further increases in productivity were likely to hold inflation to very low levels over the next year or two."

In the minutes, the Fed basically said that it expects resource utilization to remain low for the next one or two years, resulting in a "very low" inflation rate and requiring little in the way of future interest rate hikes. The minutes fit the view of those who believe the Fed won't raise rates until 2005, and they put a timeline on what the Fed might mean by "considerable period." The minutes assuaged concerns that developed in the bond market after Tuesday's FOMC meeting, when the Fed indicated it was less worried about risks for further disinflation and was more confident about the economic outlook.

Like Yesterday, but Much Has Changed

As of the Oct. 28 meeting, the Fed had yet to see any gains in the monthly payroll data, dating back as far as last January. But when the October payroll data were released on Nov. 7, there were sharp upward revisions to payrolls in both August and September. The data had initially indicated a loss in jobs for both months, but that was revised to show gains. Since then, we've seen two additional months of gains. So, the Fed now has four months of payroll gains in hand compared to zero as of Oct. 28. Therefore, the timeline for when the Fed likely believes excess capacity would be absorbed might now be one to one-and-a-half years, instead of one to two years.

Given that monetary policy operates with a long lag (many believe that there's a lag of at least 18 months before the full effects of interest rate moves have their intended effect), and given the fact that the Fed typically acts before the excess slack in the economy is fully absorbed, it still appears likely that the Fed will raise rates in 2004, but it clearly is in no rush.

At this point, given the somewhat conflicting message of the Oct. 28 minutes and the Dec. 9 policy statement, upcoming speeches by Fed members should help to settle the score. Nevertheless, the FOMC is now using "baby steps" as its modus operandi because of its beliefs about the excess slack in the economy. All of this seems at odds with the implications of the behavior of the economy, equity prices, commodities and the dollar on the future levels of inflation.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of

Bondtalk.com, a popular Web site covering the bond market and the economy. He appreciates your feedback and invites you to send it to

Tony Crescenzi.

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