FOMC Minutes Imply Beginning of Fed Exit Strategy

The minutes of January’s FOMC meeting show no expectation that rates or inflation are soon to explode higher.  But what is becoming more evident is that this near-zero rate policy is starting to have run its course.  The expectation is now for 3.2% economic growth in 2010, up from about 3% expected just in November.   After going through these minutes, the end of a near-zero rate policy appears to be much closer to an end than we have seen in quite some time.

Fed Governor Hoenig was the dissenting vote at the last meeting, and he wanted a shift on that perpetual low rates vow to “some time” rather than an “extended period” and he was concerned that inflation expectations may rise.

Overall, the FOMC was spending more time evaluating how would be best to unwind the billions (or is it trillions now?) of stimulus.  One potential is the sale of mortgage-backed securities.

Officials now expect see core inflation of 1.4% in 2010, up from 1.3% expected in November.  On the unemployment rate, the FOMC expects 9.6% in Q4-2010 versus a prior expectation of 9.5%.

The largest change here is not really on the Fed Funds rate, but there was at least some contemplation of a change to the discount rate.  It discussed a hike 25 basis-point hike in the discount rate as a tool of withdrawing some of the floodgate money that had been opened to the economy.

It is extremely rare to see changes in the discount rate without a change in the Fed Funds rate.  A move of that extent would have still likely caused banks to raise their Prime Rate from 3.25% today, which it has been for more than a year, to 3.50%.

Rates will rise ultimately.  Whether “some time” or an “Extended period of time” prevails, rates can’t go under zero where they effectively sit today.

If you are a die hard Fed-Head, the full minutes are here.

JON C. OGG