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MONEY
Janet Yellen

Fed minutes: Little changed

John Waggoner
USA TODAY
Federal Reserve Chair Janet Yellen arrives for a Board of Governors meeting at the Federal Reserve in Washington, Wednesday, Sept. 3, 2014. The meeting is to discuss a final rulemaking to implement a quantitative liquidity requirement in the United States as well as a proposed rule on margin requirements for non-cleared swaps of prudentially regulated swap entities.

The September minutes of the Federal Reserve's powerful Open Market Committee showed little change from its previous statements — which made bulls on Wall Street extremely happy.

The Dow Jones industrial average soared more than 100 points on signs the Fed wouldn't raise short-term interest rates soon.

As expected, the Fed said that it planned to end its market-friendly bond-buying program, called quantitative easing, after this month. The Fed has been purchasing Treasury and mortgage-backed securities to keep long-term interest rates low.

And the Fed showed no inclination to increase the key federal funds rate, currently near zero. In its statement, the Fed said that it plans to keep the fed funds rate at its current level for a "considerable time" after its bond-buying program ends.

In March, Yellen said that "a considerable time" could mean "six months," which would put the first fed funds increase around May.

Two members of the committee, Richard Fisher, president of the Dallas Fed, and Charles Plosser, president of the Philadelphia Fed, dissented. They dissented at the July meeting as well.

The Fed's mandate is to keep the economy growing at a rate that doesn't produce inflation. In the FOMC's minutes, the Fed said that labor conditions had improved, but that the unemployment rate was little changed. Another worry: Most measures of earnings showed little increase, in part because workers were in ample supply.

Other worries:

•The housing recovery remained slow in all but a few areas, despite extremely low mortgage rates.

•Slow growth in Europe could mean a higher value for the dollar, making U.S. exports more expensive.

•Fiscal policy — that is, diminishing government spending — was restraining economic growth.

"The most relevant shift in the minutes was the focus on the dollar," says Bill Irving, portfolio manager of Fidelity Government Income fund. "It has appreciated against the euro, the yen and the pound because of persistent global economic stagnation."

And despite the Fed's easy-money approach, there's little sign that Wall Street is concerned about inflation, even in the long term," Irving says. Based on implied inflation expectations from yields on Treasury Inflation-Protected Securities (TIPS), Wall Street's long-term inflation expectations are nearly a quarter of a percentage point below the Fed's, he says.

More worrisome: The Fed will find it easier to fight inflation with rates near zero than it will find fighting economic weakness, Irving says. The Fed can raise interest rates fairly easily to combat rising prices. If the economy slumps again, "It has few bullets left," he says.

Because the financial outlook in Europe has dimmed since the Fed's last meeting, some economists think that Fed rate hikes might not start until the third quarter of 2015. The bellwether 10-year Treasury note yield has sagged to 2.38% from 3.03% at the end of 2013, despite the Fed's bond purchases, indicating low inflation and low economic activity. "The disinflationary implications of global economic slack and a stronger dollar exchange rate suggest that the first hiking of fed funds may not occur until 2015's third quarter," says John Lonski, Team Managing Director, Economics Group, at Moody's Analytics.

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