Why the Fed Will Raise Rates Slower -- Yes, Slower -- Than You Think

NEW YORK (TheStreet) -- In the usual hubbub over the Federal Reserve's short-term machinations on interest rates, a bigger point has been lost today -- the central bank seems to be leaning toward keeping rates lower, for longer, than we thought.

Little noted in early reports about newly-released minutes of the March meeting of the Fed's Open Market Committee is a discussion about why the bank should move very slowly even after it begins to hike interest rates in late 2015 or 2016. The reasons: An aging work force, higher savings as people built up more reserves n the wake of the 2008 financial crisis and recession, slower expansion in the economy's capacity (or potential growth rate) due to years of weak corporate investment -- and even the tight lending environment that has made it tougher for consumers to borrow and spend their way into trouble again.

"Participants observed that a number of factors were likely to have contributed to a persistent decline in the level of interest rates consistent with attaining and maintaining the Committee's objectives," the Fed's minutes read. "In particular, participants cited higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit."

Now remember, in the hours after the Fed's meeting, the bond market decided that the FOMC's actions and minor changes in its members' forecast for rate hikes meant rates would be moving higher, sooner, than the market had thought. The minutes show that the opposite is true.

Indeed, the minutes show that members correctly guessed the market's likely reaction to the Fed changing its guidance on interest rates, dropping its statement that rates would not rise before the unemployment rate, now 6.7%, went below 6.5%. Rates went up after the March 18 to March 19 meeting, on fears that shifts in committee members' forecasts pointed to early hikes in the federal funds rate, which the Fed directly controls.

Officials were divided on the best way to make clear that rates won't be rising quickly -- even as nearly all of them wanted to make clear monetary policy will stay very "accomodative,'' and rates will stay much lower than they would be in a more-normal expansion that didn't follow a financial crisis. One member proposed lowering the unemployment threshold for raising rates to 5.5% and raising the Fed's inflation target to 2.25%, from the current 2%. Each move would point to the central bank being determined to put off significant rate hikes for longer.

In the end, the Fed opted for more-nebulous language that emphasized that major rate hikes aren't coming until the economy shows more strength across a range of labor-market indicators, from the number of new job openings to growth in wages.

That approach has its virtues in terms of leaving new Fed chair Janet Yellen the flexibility to react to events. But it also let the market guess wrong about what the central bank is up to.

The minutes remove pretty much any remaining doubt. By adding to the list of reasons to keep rates lower for longer -- and expanding them beyond the labor-market indicators the market has been focused on -- Yellen and Co. are making clear that the patient will keep getting the Fed's low-rate medicine for as long as it takes to achieve a full recovery.

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

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