Just-released minutes from the April 29-30 Federal Open Market Committee meeting detail how officials are still trying to grapple with how to reverse extraordinary and unprecedented measures taken during and after the financial crisis. On balance, they believe the economy has emerged from its winter hibernation.
Concocting an exit strategy
Fed officials listened to staff members about how to begin raising interest rates when it becomes necessary. More broadly, the minutes use the words "eventual normalization of the stance and conduct of monetary policy." The minutes note the discussion "was undertaken as part of prudent planning and did not imply that normalization would necessarily begin soon." Read that: "We're not taking the punch bowl away from this party anytime soon."
The cautionary comment is consistent with the projections of members of the FOMC, who have indicated that a rate hike won't come for at least another year.
Another benefit arising from the discussion was the need to communicate the policy to the public and the markets. Such early communication "would enhance the clarity and credibility of monetary policy and help promote the achievement of the committee's statutory objectives." No decisions were made on the issue, the minutes said.
Investors and economists react
The stock market was rallying after release of the Fed minutes, an indication that investors aren't fearing an immediate rate hike. On balance, economists said the minutes indicated more clues on process than clues on timing of the Fed's "exit."
As for when such action may come, "the decision will be based on the improvement in the economy and not the calendar," said Lindsey Piegza, chief economist with Sterne Agee.
Inflation, what inflation?
While many Americans continue to struggle with low wage growth, persistent long-term unemployment and rising prices for staples such as food, energy and education, the Fed is sticking to its monetary policy mantra that long-term inflation poses little, if any, threat. The minutes state flat-out, "Because inflation was expected to remain well below the committee's 2-percent objective and the unemployment rate was still above participants' estimates of its longer-run normal level, the committee did not, at present, face a trade-off between its employment and inflation objectives." Translation: We can continue to keep rates low to keep our balance sheet at above $4 trillion while working to lower unemployment without igniting worrisome inflation. This is the centerpiece of current Fed policy.
What are we worried about now?
Downside risks to the economy, as the Fed sees it, include the slowdown in the housing market, the threat of a more serious slowdown in China and further tensions arising between Russia and Ukraine. On the housing market, FOMC members cast blame on factors such as rising home prices that limit access to buyers, a shortage of available lots, and labor shortages, as well as -- yes, we'll say it again -- the severe winter weather.
A couple of Fed officials complained about the availability of access to mortgages, noting that "lending standards were tight compared with historical norms."
Yellen up to the plate
Earlier at Yankee Stadium, Fed Chair Janet Yellen delivered a mostly "unwonky" commencement address to New York University graduates. She told the students the venue was an appropriate setting while noting that, "You won't succeed all the time. Even Ruth, Gehrig and DiMaggio failed most of time when they stepped to the plate."
Yellen said the Fed learned that lesson when it was responding to the financial crisis. "Not everything worked, but we kept at it, and we remained focused on the task at hand. I learned the lesson during this period that one's response to the inevitable setbacks matters as much as the balance of victories and defeat," she said.
Meanwhile, in the Senate…
On a 68-27 vote, the U.S. Senate approved the nomination of Stanley Fischer to the Federal Reserve Board of Governors. At the same time, it stopped short of approving his nomination to be the Fed's vice chair. That vote remains, as yet, unscheduled.
Fischer would succeed Yellen, who moved into the central bank's top leadership post earlier this year.
Decisions on two other appointments await Senate action. President Barack Obama has nominated former Treasury official Lael Brainard to the Fed board and has nominated Jerome Powell for another term.
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