Fed officials fretted about hawkish 'dots' forecasts - minutes

By Jonathan Spicer and Ann Saphir

WASHINGTON/SAN FRANCISCO (Reuters) - Federal Reserve officials fretted last month that investors would overreact to fresh forecasts that appeared to map out a more aggressive cycle of interest rate increases than policymakers actually anticipated.

The published forecasts, known as the "dots" charts, suggested the federal funds rate would end 2016 at 2.25 percent, a half percentage point above Fed officials' projections in December. Bonds fell when the charts were initially released, at the close of the U.S. central bank's March 18-19 meeting, as investors priced in slightly sharper rate rises.

But in minutes of the meeting published on Wednesday, several of the meeting's participants noted the charts "overstated the shift in the projections," suggesting the Fed is not as eager to tighten policy as the dots had seemed to suggest.

Major U.S. stock indexes rallied after the minutes were released, with the S&P 500 posting its largest daily gain in three weeks, while the U.S. dollar weakened. Traders pushed out their expectations of a first Fed rate hike by about six weeks, to July 2015, trading in interest-rate futures showed.

"People are taking solace in the idea that the Fed may be more accommodative than previously thought, for longer than previously thought," said Steve Sosnick, an equity-risk manager at Timber Hill/Interactive Brokers in Greenwich, Connecticut.

The minutes also showed that officials wanted to emphasize that the official policy statement, and not the dots charts, give a better indication of the likely path of rates.

Interactive graphic: http://link.reuters.com/tan23v

Fed dove-hawk scale: http://link.reuters.com/ryq66v

The minutes shed little new light on what might prompt an eventual policy tightening after the Fed ends its bond-buying program, which most policymakers thought would be completely wound down in the second half of 2014.

After the meeting, the Fed said in a statement that it would wait a "considerable time" after ending its bond-buying program before finally raising interest rates.

Fed Chair Janet Yellen played down the "upward shift" in Fed officials' rate forecasts in her post-meeting press conference, saying that the "dots" are not the Fed's primary way to communicate policy.

But what drew the most attention from financial markets was her definition of "considerable time" as "around six months," depending on the economy.

That comment, along with the forecasts that suggested rates could rise more sharply than Fed officials previously thought, sent stocks and bonds tumbling that day.

The minutes, published with the typical three-week lag, record no discussion of what timeframe the Fed viewed as "considerable."

It did show officials were unanimous in wanting to ditch the thresholds they had been using to telegraph a policy tightening.

"(A)ll members judged that ... it was appropriate to replace the existing quantitative thresholds at this meeting," the minutes said.

"Almost all members judged that the new language should be qualitative in nature and should indicate that, in determining how long to maintain the current (low) federal funds rate, the Committee would assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation."

A couple of the voting members wanted to commit to keeping rates low if inflation remains persistently below the Fed's 2-percent goal.

The minutes included little on what specific economic conditions might prompt the Fed to raise its key rate from near zero, where it has been since the depths of the recession in late 2008. But they showed that Fed officials engaged in a vigorous discussion of how best to tweak rate guidance, including in a previously undisclosed March 4 videoconference.

"We weren't expecting a ton of changes and we didn't get them," said Todd Schoenberger, managing partner at Landcolt Capital in New York. "As the economy sputters along, the Fed will continue doing what it needs to do."

(Reporting by Jonathan Spicer and Ann Saphir; Additional reporting by Ryan Vlastelica and Richard Leong; Editing by Andrea Ricci)