Yesterday afternoon the Federal Reserve released minutes from its March 18-19 meeting.  Perhaps unsurprisingly, the Fed minutes focused attention towards the “six-month” comment made by chairwoman Janet Yellen.

The six-month comment refers to the inference the market as a whole made last month – based upon Yellen’s comments – that the Federal Reserve may increase the federal funds target rate six months after the end of QE III.

Quantitative easing – better known as QE III – is on track to be phased-out in the August/September time frame.  Adding six months from fall 2014 puts the initial federal funds rate increase happening in February/March 2015.

Federal Reserve officials sound dovish

The market took this as hawkish.  Thus, an unsurprising amount of effort was made by Federal Reserve officials to sound much more dovish this time around.

In addition to the move to appear more dovish, the Federal Reserve also focused attention on how quickly rate hikes would take place after the initial rate increase, vaguely implying that rate increases would happen slowly (or at least, the Fed attempted to sound incredibly dovish).

In addition to these comments, the FOMC addressed why it thinks rates should stay low for a long time even as inflation risk increases and the employment picture improves.

The Federal Reserve’s dovish argument is basically a headwinds one.  The labor market and inflation pictures are weak for various reasons, including global demand conditions and debt/credit overhang.

Behind the headwinds argument is the critical assumption that nothing has changed with the overall structure of the American labor market.

This critical assumption ignores the likely fact that the long-run “neutral rate” for employment is not what it used to be, regardless of what the FOMC wants to believe.

Labor market has a become European

Essentially, the U.S. labor market has become European, but the Fed wants to ignore this argument.

The market will certainly see who ends up being right.  If you were betting, would you bet the unemployment rate reaches 4 percent before inflation picks up?  Most probably wouldn’t, although the Fed would.

In addition to the dovish view of the labor market and dousing an evidence of concern for inflation, the Fed’s minutes focused some attention to financial stability, with the minutes noting trends in credit spreads and other financial market conditions.

As an update on how long the Federal Reserve has left the target federal funds rate where it is, the following is that picture.  The first is a look at the loosening cycles and the second looks at the tightening cycles since the given cycle’s peak.  The horizontal axis represents the number of days the the federal funds rate has been below its previous peak.  The vertical axis represents the rate. The year label represents the year in which the peak federal funds rate was reached.

For instance, the 2007 line shows the change in the federal funds target rate since peaking (the Fed starts lowering it) in late 2007.  As is shown, the current loosening cycle is the longest on record.  By the time the Federal Reserve gets around to allowing rates to be more normal, at least 2,600 days will have passed since the initial lowering in 2007.

Federal Reserve loosening

 Federal Reserve tightening