Fed Says Economy, Not Calendar, to Guide Rate Hikes

Federal Reserve officials apparently mean what they say when it comes to keeping rates near zero for an "an extended period," as most affirmed that economic conditions rather than a fixed timetable will guide monetary policy, according to minutes from the central bank's March meeting.

Some Fed watchers have taken its famed "extended period" language to mean about six months, but several officials on the central bank's Federal Open Market Committee dispelled such notions. "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," the minutes read.

Although the central bank pledged to keep the Fed funds rates in the 0% to 0.25% range when it last met March 16, analysts, economists and market participants routinely scrutinize the minutes released three weeks after the fact for clues as to where monetary policy might be headed.

Repeat lone dissenter Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, once again voiced concern that the Fed's language of "exceptionally low rates" for "an extended period" could lead to the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability. Hoenig would have the Fed change its policy language to "a low level of the federal funds rate for some time," according to the minutes.

Core inflation remains well within the Fed's comfort zone, while unemployment is forecast to stay stubbornly high well into 2012 due to the moderate pace of economic growth. With more than 8.4 million jobs lost since the end of 2007, the central bank has made it clear that job creation is its top priority for now.

In late February the Fed surprised the markets by raising the discount rate it charges on loans to banks. The Fed raised the discount rate to 0.75% from 0.5% in order to encourage banks to tap money markets rather than the central bank for short-term loans.

Shortly thereafter Chairman Ben Bernanke told lawmakers in testimony before Congress that the Fed expects unemployment -- currently at 9.7% -- to fall to only about 7% by the end of 2012. Inflation, meanwhile, is forecast to run at just 2% this year.