For most of this year, I have interpreted the Federal Reserve’s policy to maintain “exceptionally low levels of the federal funds rate for an extended period” as the equivalent of low rates for at least the next six months from each new confirmation. This interpretation came from a January interview with New York Federal Reserve President William Dudley. However, today’s release of minutes from the Federal Reserve’s March meeting now clears the way for interest rate hikes at any time (emphasis mine):
“Nearly all members judged that it was appropriate to reiterate the expectation that economic conditions–including low levels of resource utilization, subdued inflation trends, and stable inflation expectations–were likely to warrant exceptionally low levels of the federal funds rate for an extended period, but one member believed that communicating such an expectation would create conditions that could lead to financial imbalances. 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; conversely, 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…”
It still seems extremely unlikely that the Federal Reserve will move before the November elections, but these minutes put us on notice that the Federal Reserve will operate with the flexibility requested by policymakers such as Thomas Hoenig, President of the Federal Reserve Bank of Kansas City. Rates are now fully conditional on developing economic conditions and are unhinged from any timetable suggested by the phrase “extended period.”
Be careful out there!
Full disclosure: no positions