Fed Minutes Show Extended Debate on Rate Guidance

Andrew Harrer/Bloomberg via Getty ImagesFederal Reserve Chair Janet Yellen WASHINGTON -- The Federal Reserve struggled last month over how to convey to investors the pace at which it will raise short-term interest rates once it increases them from record lows. Two weeks before the Fed's regular meeting March 18-19, it held an unusual and previously unannounced videoconference to debate the issue, according to minutes of the meeting released Wednesday. In the end, the Fed settled on an open-ended approach: That even after employment and inflation are nearly back to normal, short-term rates may need to stay unusually low for a while because the economy isn't fully healthy. Stock and bond investors read the minutes to signal that the Fed plans to favor low short-term rates longer than many had assumed. Stocks rose sharply after the minutes were released, and bond yields fell. The Dow Jones industrial average, which had risen modestly before the minutes were released, was up 154 points 30 minutes later. Investors have been intensely following the Fed's guidance on rates because higher short-term rates would elevate borrowing costs and could hurt stock prices. The minutes covered the first Fed meeting at which Yellen presided as well as the March 4 videoconference. At both sessions, the issue of the language the Fed uses in its statements to signal the timing of future policy actions was a topic of extended debate. The Fed has kept its key short-term rate at a record low near zero since December 2008. It made no change to that rate at the March meeting. But it dropped language from its statement that had previously said this rate would likely remain low "well past" the time unemployment fell below 6.5 percent. Instead, the Fed said it would review a "wide range of information" before starting to raise rates. It repeated language that it expected to keep rates low for a "considerable time" after it stops buying bonds. Also at the March meeting, the Fed approved another cut in its monthly bond purchases of $10 billion to $55 billion a month. Those purchases are intended to keep long-term loans rates low to spur borrowing, spending and economic growth. The monthly purchases had been held at a level of $85 billion a month all last year. The Fed announced an initial $10 billion cut in December and another in January. Many economists think the Fed will keep reducing the bond purchases by $10 billion at each meeting this year before ending them altogether late this year. Asked at a news conference after the Fed's meeting last month to define a "considerable time," Yellen said it "probably means something on the order of six months." Her remark jolted markets. It seemed to signal that the first rate hike could occur next spring, sooner than many investors had been expecting. But in a speech March 31, Yellen made clear that she thought the job market was still far from healthy and would need the help of low rates "for some time" to come. The minutes issued Wednesday seemed to confirm that short-term rates will likely remain low for a considerable time, even after the Fed has begun to raise rates.