The Federal Reserve released the minutes from its March 16th meeting today. As in January, Fed economists continued to see signs of economic improvement, but have no intention of raising interest rates anytime soon. Also the same as in January was Kansas City Fed President Thomas Hoenig's dissent regarding the usage of the "extended period of time" language for how long rates would be kept exceptionally low. Hoenig is just one voice on the committee, but the March minutes may indicate that investors took his dissent very seriously.

The Staff Review of the Financial Situation from the minutes says:

The decision by the Federal Open Market Committee (FOMC) at the January meeting to keep the target range for the federal funds rate unchanged and to retain the "extended period" language in the statement was widely anticipated by market participants. However, investors reportedly read the statement's characterization of the economic outlook as somewhat more upbeat than they had anticipated, and Eurodollar futures rates rose a bit in response.

It's no secret that investors hang on the Fed's every word. But if you compare the January and December economic outlook sections, it's very hard to see how investors saw a significant, unanticipated difference. Here are the changes in the economic outlook sections from December to January tracked (click on it for a bigger image):

dec-jan fed doc comparison.PNG

As you can see, they're pretty similar. The FOMC made changes like replacing "pick up" with "strengthen" and "appears to be" with "is". The more significant differences included removing sections about businesses cutting back spending and policy actions stabilizing the market. It's hard to see how the Fed could have been slightly more optimistic but have changed much less. Did the market really react these tweaks?

Perhaps, but it's more likely they reacted to a much more significant difference from past meetings: a committee member dissent. The January statement also said:

Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Now that's a change. Suddenly, we've got a FOMC voter now adamantly arguing that interest rates might need to be raised sooner than the market might anticipate. He felt so passionately that he chose to be the sole dissenter. Investors more likely saw this as a sign that it wouldn't be long before other committee members agreed and the Fed began more formally backing away from stating that interest rates would remain very low "for an extended period."

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