Ron Antonelli/Bloomberg

The Dark Art of Decoding Fed Minutes in Age of Transparency

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Every six weeks, minutes of Federal Reserve policy meetings are tossed out to eager central bank watchers looking for fresh insights into officials’ thinking.

They appear at first blush to be a thorough and straightforward record of the to-and-fro that precedes each important Fed move. Don’t be fooled, say some former officials who helped produce the documents.

As you scour the next set of minutes Wednesday for clues to the timing of the first interest-rate increase since 2006, it will take a keen eye and something like a policy decoder ring. And even then you may not be getting the full story. Some important details emerge only with the release of full transcripts half a decade later. Other clues can easily be misread.

“If you’re going to play this game, you have to read them regularly,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington who helped edit minutes for almost two years as a Fed economist. “You’re less likely to misconstrue something if you do.”

The minutes released this week will be the last before the Federal Open Market Committee meets Sept. 16-17, when the committee is expected to raise the policy rate, according to 77 percent of forecasters in a Bloomberg survey taken Aug. 7-12.

It’s helpful to know that not every remark from the two-day talkfest makes it into the record. The FOMC’s own rules stipulate only that the document should represent “a full and accurate report of all matters of policy discussed and views presented” and “sets forth all policy actions.”

Multiple Revisions

A small group of staffers prepares the first draft, which is reviewed by the chair and then circulated to all committee members late in the week after the meeting. After they propose revisions or additions, a second draft goes out the following week. They have until noon the day before publication to register their final approval.

Occasionally, disagreements emerge over whether certain comments are important enough for inclusion, with the chair serving as the ultimate referee. Egos can be bruised.

“The truth is, pretty much everybody at some point is unhappy about one thing or another,” said Roberto Perli, a partner at Cornerstone Macro LLC in Washington who had a hand in preparing minutes during a tenure at the Fed from 2002 to 2010.

The minutes’ importance has grown over the years as the document has grown gradually more detailed. The biggest change occurred at the end of 2004 when the committee shortened the release lag to three weeks, meaning they appeared before the next meeting.

“That makes everything from 2005 on much different,” said Donald Kohn, a former Fed vice chairman. “It does have an effect on people’s perspective of what might happen at the next FOMC meeting and where the committee was going.”

Few Bombshells

Despite that, the minutes rarely drop bombshells that have a big impact on financial markets.

“Generally I don’t expect to read the minutes and come away with an ‘aha’ moment,” said Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington and a former senior adviser at the Fed board. “I find the headlines are more breathless than the content actually deserves.”

Still, economists, money managers and journalists pore over every utterance for signals about what Fed officials are thinking. And some words mean more than others.

For example, speakers are subtly ranked. Everyone on the committee is a “participant,” but only those with a vote on policy decisions are referred to as “members.” They include board governors, the president of the New York Fed and whichever regional presidents hold the committee’s four rotating votes.

Code Words

Then there are the “counting words,” which offer a rough guide to how many participants, or members, support a particular sentiment. These are held to a strict ranking. “Many,” for example, is greater than “several,” but fewer than “most.”

Kohn said that can be misleading.

“Not every person can talk on every subject,” he said. “Just because ‘a few’ people say something doesn’t mean a lot of other people weren’t thinking the same thing.”

Other phrases carry a bit of legend. Perli said that during his years at the Fed the phrase “it was noted” most of the time referred to a comment from the chair -- Alan Greenspan until 2006 and Ben S. Bernanke thereafter. Yet, that might also lead to perilous assumptions.

For example, the transcript of the January 2009 meeting revealed that one comment in the previously published minutes, introduced with an “it was noted,” clearly came from Janet Yellen. But at that point she was president of the San Francisco Fed.

Yellen’s View

On the other hand, minutes of the March 17-18 meeting this year showed the following: “It was noted that ... the normalization process could be initiated prior to seeing increases in core price inflation or wage inflation.”

And at the press conference after that session, now-Chair Yellen delivered what sounded like a matching comment: “We may not see wage growth pick up, I wouldn’t say either that that is a precondition to raising rates.”

William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington, said anyone reading the minutes needs another warning: Even important revelations may be excluded.

Examples include a meeting in October 2000 when the committee, then chaired by Greenspan, received a briefing on a foreign-exchange intervention the Fed had just executed with the European Central Bank. The committee was told that price movements suggested word of the program had leaked, allowing some investors to front-run the transactions. Suspicions appeared to fall on officials abroad.

‘Totally Mum’

“That’s scandalous, and the minutes were totally mum,” Poole said. “So, anyone reading the minutes ought to understand there may be very important things left out.”

Fed spokesman David Skidmore declined to comment beyond what the central bank had already disclosed about how the minutes are produced.

Kohn, who was secretary of the committee and, thus, responsible for the minutes in 2000, said after reviewing the transcript he didn’t agree that anything was inappropriately withheld from the minutes.

“It merited an examination by the Federal Reserve and perhaps by the Treasury,” Kohn said of the possible leak. “But the suspicion that something might have happened that had no bearing on the policy discussion? I’m not sure that merits inclusion in the minutes.”

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