The Federal Reserve's Federal Open Market Committee (FOMC) met today to discuss monetary policy. The statement it issued was almost identical to what it said in January. It sees the economy continuing to improve, though slowly, with inflation likely subdued for some time. It also indicated that the winding down of its emergency facilities would continue, as scheduled. Finally, it reiterated that it intended to keep the federal funds rate very low for an "extended period of time."

That final aspect of the statement has become the most controversial in recent months. One member of the FOMC, Kansas City Fed President Thomas Hoenig dissented in January that the language used should be a little more conservative in terms of setting the market's fed funds rate expectation. The minutes of the January meeting explained that he have preferred if the committee stated that the rate would be low "for some time" instead of for an "extended period of time." That way the FOMC would have more flexibility to act swiftly to raise rates, if necessary, without upsetting the market.

While the difference is subtle, whenever the Fed does make this change in language, you can be sure that the market will react. Even though the broader FOMC resisted making the change in language this time around, I wouldn't be surprised if you see it in April or May. The committee can't keep rates near zero forever, so they're going to have to begin getting the market used to the idea that rates will increase eventually.

Other than that, the March statement was almost a copy-and-paste of January's statement. The only even vaguely significant difference in language is that concerning the possibility that the FOMC would extend or increase its residential mortgage security purchase programs. In January, the committee made clear that it probably wouldn't do so, but the March statement puts that hope pretty much to rest for good. In January, it said:

The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

This changed in March to:

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

That slight movement towards more general language probably means that it's put the residential mortgage security purchase tools back in their box, locked it and put it back on the shelf. Naturally, it's possible that they revisit such policies if the economy or residential mortgage market suddenly deteriorates further, but it's pretty clear that the FOMC doesn't see that happening at this time.

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