FOMC Minutes Guide: From Greece Fallout to Rate-Liftoff Outlook

Here’s what to look for when the Federal Reserve releases minutes from the Federal Open Market Committee’s June 16-17 meeting at 2 p.m. Wednesday in Washington.

-- Concern over Greece and other potential headwinds from abroad: Investors will be alert for hints that officials were open to delaying their first interest-rate increase since 2006 amid uncertainty over Greece’s future in the euro zone.

“It will be important to see with what urgency the FOMC discussion centered on Greece and international developments,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

Federal funds futures traders reduced the probability of a September move and the yield on the 10-year U.S. Treasury note has dropped following a “no” vote by Greeks on Sunday that increased the risk they will exit the common currency area.

A discussion among officials that dwelled on the threat of contagion from Greece and the potential for disruptive market fallout would probably reinforce bets they will delay.

“International developments will reinforce their view that the world can be a scary place, and uncertainty leads to doing nothing,” said LaVorgna.

Fed policy makers had previously noted risks from international developments including Greece and a slowdown in China. Since mid-June, the Shanghai Composite Index has declined steeply, forcing authorities to suspend initial public offerings, relax margin trading rules and take other steps.

Dot Plot

-- The FOMC minutes may add perspective to the debate among officials about the likelihood of one or more rate rises this year. Quarterly projections at the June meeting showed that five of 17 officials foresaw only one increase in the benchmark rate this year, as opposed to two or three moves. That was up from just a single policy maker who forecast in March that only one increase would be warranted.

“There might be some discussion of when the five people who expect just one increase this year would want that one increase to come,” said Jonathan Wright, a professor at Johns Hopkins University in Baltimore and a former economist at the Fed’s Division of Monetary Affairs. “The most obvious time is December, but there might be some support for a 25 basis-point hike in September, followed by a long pause.”

-- Economists at BNP Paribas in New York have examined recent occasions when the market reacted strongly to a shift in the projections of individual Fed officials for where they think rates should be. These forecasts, displayed in a so-called “dot-plot,” provoked sharp moves in March and September 2014 and in March 2015. The research found that the minutes associated with those meetings subsequently struck a measured tone, said Laura Rosner, U.S. economist at BNP.

Dovish Signal

“The minutes were far more balanced and walked back the market,” Rosner said, adding that this time, the tone will probably be “kind of pushing against the dovish signal.”

-- A more upbeat view of inflation returning to the Fed’s goal of 2 percent might figure in the minutes following a leveling in oil prices and stabilization of the dollar, said Stephen Stanley, chief economist at Amherst Pierpont Securities.

“The temporary factors that were pushing inflation down, oil prices and the dollar, seem to be fading,” Stanley said. “There will be increased confidence that inflation will push back to 2 percent over time. They are starting to see a little movement on the wage side as well,” adding to confidence.

-- The tone of the economic discussion could be more upbeat. Second-quarter data have improved and indicators have picked up further since the meeting, said Omair Sharif, a rates sales strategist at Societe Generale in New York.

Consumer Confidence

“Since the last minutes, we’ve gotten some headwinds and tailwinds,” he said. “They have to be optimistic about the consumer,” given strong spending. Minutes of the previous FOMC meeting were released on May 20.

Personal spending picked up by 0.9 percent in May, the most since 2009, a June 25 Commerce Department report showed, bolstering second-quarter forecasts after the economy shrank 0.2 percent at an annual pace in the first three months of the year.

-- Any discussion of when to reduce or cease reinvestments of maturing securities on its balance sheet would add to Chair Janet Yellen’s comment that the “committee has really not made any further decisions” on the issue. The Fed must decide whether to reinvest $216 billion of proceeds from maturing Treasury securities next year, or shrink its balance sheet by allowing the debt to expire.

“Some discussion of the mechanics of policy normalization” could well have been presented in a staff briefing, Stanley said.

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