U.S. economy: The Fed behind closed doors

The U.S. Federal Reserve, the nerdy steward of the world's largest economy, has two very important jobs: 1) to keep inflation at bay, and 2) to help the overall employment picture.

So it's perhaps not too surprising that the latest peek inside the Fed's thinking — released minutes from its Mar. 15 Federal Open Market Committee meeting — shows a deep concern with the longer-term threat of inflation, its own little "i" word.

The latest minutes also, not surprising, state the Fed's opinion on the improving picture of the U.S. labor market.

Overall, the Fed says the U.S. economy is on firmer footing:

"The economic recovery continued to proceed at a moderate pace, with a further gradual improvement in labor market conditions," the minutes read. "Sizable increases in prices of crude oil and other commodities pushed up headline inflation, but measures of underlying inflation were subdued and longer-run inflation expectations remained stable."

But the Fed warned those inflation worries may worsen in the future for businesses and consumers, particulary with the ongoing unrest in the Middle East and North Africa, and the uncertainties surrounding the devastating earthquake, tsunami and nuclear disasters in Japan, the world's third largest economy:

"A significant increase in longer-term inflation expectations could contribute to excessive wage and price inflation, which would be costly to eradicate," the Fed said.

Translation: things could get worse down the road, so let's watch it closely.

The Fed also said that it is maintaining, at least for now, its very loose monetary policy.

Here's the cheap money rationale — Fedspeak uncensored in all of its gritty, geeky and glorious detail: 

"Although the unemployment rate had declined in recent months, it remained elevated relative to levels that the Committee judged to be consistent, over the longer run, with its statutory mandate to foster maximum employment and price stability. Similarly, measures of underlying inflation continued to be somewhat low relative to levels seen as consistent with the dual mandate over the longer run. With longer-term inflation expectations remaining stable and measures of underlying inflation subdued, members anticipated that recent increases in the prices of energy and other commodities would result in only a transitory increase in headline inflation. Given this economic outlook, the Committee agreed to continue to expand its holdings of longer-term Treasury securities as announced in November in order to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee's mandate. Specifically, the Committee maintained its existing policy of reinvesting principal payments from its securities holdings and reaffirmed its intention to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. A few members remained uncertain about the benefits of the asset purchase program but judged that making changes to the program at this time was not appropriate. The Committee continued to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, were likely to warrant exceptionally low levels for the federal funds rate for an extended period."

Feeling better now?