Fed Minutes Guide: From Slowing Economy to Rate-Rise Timing

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What to Look for From FOMC Minutes

Here’s what to look for when the Federal Reserve releases minutes from the Federal Open Market Committee’s March 17-18 meeting at 2 p.m. Wednesday in Washington.

-- The minutes may reveal whether Fed policy makers think the economy’s weakness so far this year represents a temporary pause or a persistent slowdown, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

The committee probably discussed a host of data, much of it showing the economy’s performance during the first three months of 2015 was disappointing. FOMC members responded by lowering their forecasts for economic growth, inflation and the appropriate path for the Fed’s benchmark interest rate. Their median estimate for the federal funds rate at the end of 2015 fell to 0.625 percent from 1.125 percent in December forecasts.

“The minutes could shed light on what the Fed views as the primary driver of first-quarter weakness,” LaVorgna said. “I’ll be looking for anything that suggests the Fed is taking a more cautious approach to rate hikes this year.”

LaVorgna said the lower rate forecasts released last month aren’t fully explained by the weakness of economic data. Much of the softness can be seen as temporary or seasonal, like the dip in inflation linked to energy costs or consumption dented by harsh winter weather, he said.

One piece of information policy makers didn’t have at the March meeting was the jobs report showing that employers added only 126,000 positions that month, the fewest since December 2013.

Tightening Pace

-- Pace of rate increases. The minutes may also shed light on the debate over the timing and subsequent pace of interest-rate increases, said Michael Hanson, senior U.S. economist at Bank of America in New York.

Chicago Fed President Charles Evans, who votes on policy this year, argued in a March 19 speech that if the Fed delayed raising rates until next year, it would run less risk of killing the recovery. If the delay sparked inflation, the central bank could always accelerate subsequent tightening, Evans said.

“We’ve seen a bit of that debate and it will be interesting to see in the minutes whether that comes out and how much support it has,” Hanson said of Evans’s argument. “Broadly, the committee seems to have bought into idea that they’ll start relatively soon and go really slow.”

“We’re going to look for clues about how low will unemployment go before the Fed will be comfortable raising rates,” said Anne Mathias, managing director and senior macro strategist at Guggenheim Partners in Santa Monica, California.

New York Federal Reserve Bank President William C. Dudley said on Monday that the path of interest-rate increases is likely to be “shallow” once the Fed starts to tighten, and recent economic weakness probably won’t persist.

Low Inflation

-- Inflation. With unemployment having declined to 5.5 percent in February and March, the committee is increasingly focusing on inflation, according to Kevin Logan, chief U.S. economist at HSBC Securities USA Inc. in New York.

“The decision to move earlier or later will depend on inflation,” Logan said. “The markets’ reaction, if there is any, will probably come from any surprise or emphasis on the inflation outlook.”

Dual Mandate

The Fed has a dual mandate: full employment, which it currently considers to mean a jobless rate between 5.0 percent and 5.2 percent, and stable prices, which it sees as an inflation rate of 2 percent.

The Fed’s preferred measure of price pressures rose just 0.3 percent in the year through February, dragged down by the plunge in oil prices and the strength of the dollar. It hasn’t reached 2 percent since April 2012.

Chair Janet Yellen has said the committee won’t wait for inflation to hit 2 percent before it raises rates. It will simply need to be “reasonably confident that inflation will move back to its 2 percent objective over the medium term,” according to the FOMC’s statement after the March 17-18 meeting.

Yellen has so far declined to be specific when asked what would make her “reasonably confident” about inflation, a vagueness that has frustrated some economists.

“I would hope to see a bit more meat about what metrics they would look to and how much momentum they would need,” said Derek Holt, an economist at Scotiabank in Toronto. “It would be nice if they partially spelled them out.”

Strong Dollar

-- Eye on the dollar. If the minutes show there’s another issue that weighed on the committee, LaVorgna’s betting it was the dollar.

The greenback has appreciated 18 percent in the past 12 months, including a 5.5 percent gain this year, against a basket of leading global currencies. That can hurt U.S. growth by making its exports more expensive. It also damps inflation by making imports cheaper.

“One big question will be how they’re assessing the impact of the dollar,” said Bank of America’s Hanson. “Not just its impact on GDP and exports, but on inflation.”

Paul Mortimer-Lee, chief economist for North America at BNP Paribas in New York, wrote in a note to clients that he expects the minutes will show that on balance “the committee sees the dollar as trimming a little off growth and having a temporary effect on inflation, but not large enough to derail normalization.”

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