The newest FOMC Minutes from the March 16 meeting might be dovish compared to what the inflation hawks want to see, but the FOMC is coming to grips with future rate hikes.  The bias is still a “later rather than sooner” stance due to the Fed being cautious about tightening rates too soon.

Hoening wanted the language of “exceptionally low for an extended period” changed to “a low level for some time.”  His wish is not coming true, at least not yet.

As far as the liquidity measures, the FOMC officials were briefed on reserve drains at the March meeting.  The FOMC was considering letting treasury securities to mature without reinvestment and redeeming Treasuries may limit the need for other reserve draining tools.  For now, the FOMC minutes show that Uncle Sam will continue to reinvest all maturing Treasuries for now.

The data at the time in mid-March suggested that economic activity expanded at a moderate pace in early 2010.  It also noted that business investment in equipment and software seemed to have picked up.  The FOMC noted that consumer spending increased further in January and noted that private employment would likely have turned up in February had the weather not shut the Eastern Seaboard.  Output continued to trend higher in manufacturing as firms increased production to meet strengthening final demand and to slow the pace of inventory liquidation.

The FOMC did see some weakness as well.  Housing activity remained flat and the non-residential construction sector weakened further.  This may be important for the inflation hawk camp based on commodities…. The FOMC did note a “”sizable increase in energy prices pushed up headline consumer price inflation in recent months” but noted that core consumer price inflation was quite low.

The FOMC did not have the benefit of knowing about the assured jobs growth, because it only noted that “available indicators suggested that the labor market might be stabilizing.”

The long and short is that once the FOMC starts to get some internal squabbles over policy and once you start seeing continued good news mixed with some inflation concerns, asking about a rate hike becomes WHEN rather than IF.  Fed Funds are now at a 0.00% to 0.25% target rate.  In the early 1990’s, the level of 3.00% was considered by many as a floor on rates.

For those of you who are the ultimate Fed Heads, the FULL MINUTES from March 16 are here.

JON C. OGG

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