Here Are the Most Important Things to Look for in the Fed Minutes

We'll get details Wednesday on the FOMC's October meeting

Will Fed Rate Hikes Be Small and Gradual?

The Federal Reserve will release minutes from the Federal Open Market Committee’s Oct. 27-28 meeting at 2 p.m. Wednesday in Washington. These could be among the highlights: 

1. December explanation

Fed policy makers added a line to their October post-meeting statement stating that the committee would consider whether it will be appropriate to raise rates at "its next meeting." That nod to December is a noteworthy departure: The Fed has been avoiding any date-based guidance.

The minutes could provide an explanation of why the detail was added, potentially spelling out that officials expect to hike for the first time since 2006 unless an unforeseen deterioration in the economy prevents action. Chair Janet Yellen told Congress on Nov. 4 that liftoff in December was a "live possibility."

We've had some additional insight from San Francisco Fed President John Williams. He told reporters on Nov. 7 that the Fed inserted the reference to counter market sentiment that "December was no longer on the table," and pull investors back into line with policy makers' outlook that December is an option.

Traders of federal funds futures seem to have gotten the message: Expectations for liftoff  at the Dec. 15-16 meeting have staged a dramatic comeback, as the graph below shows. 

 

2. Fed communication

Pay attention also for a discussion on how officials will communicate the pace of rate increases following liftoff. This will dominate the debate once they've made the first move, and Fed speakers have repeatedly emphasized that they'll take a gradual approach. At the same time, they're loath to repeat the predictable stair-step hikes of the 2004-2006 tightening cycle, when they hiked at a measured quarter percentage-point pace per meeting. As lift-off approaches, they may clarify how they're going to retain data-dependence without causing undue market turmoil through unexpected action.

"Everybody—hawks, doves—is trying to turn the market focus less on the timing of liftoff and more on the pace that's going to follow liftoff,'' said Jacob Oubina, senior U.S. economist at RBC Capital Markets LLC in New York. "When it comes to communication, you'll probably see discussion about that: less about where do we disagree, and more about where do we agree, and we all agree that pace is more important."

3. Global risks

In the Fed's September statement, officials warned that "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term." The addition came amid concern that the Chinese economy was slowing and as markets gyrated in response to the Chinese government's August currency devaluation. The sentence was dropped from the October statement. 

"I'd be curious to see any added color about why they took it out,'' said Ryan Sweet, director of Real-Time Economics at Moody's Analytics in West Chester, Pennsylvania. The removal "suggests it was just a knee-jerk reaction and they were overly jittery," when they inserted the sentence in September, he said.  

Remarks by Fed officials since the October meeting show policy makers continue to feel sanguine about global risks and optimistic about incoming domestic data. Add to that a strong October payrolls report and the signs suggest policy makers are "forming a consensus around a December rate increase," Sweet said. So are economists in a Bloomberg survey conducted Nov. 6-12, as the graphic below shows. 

4. Exit mechanics

At some point the Fed will need to detail how it's going to shrink its balance sheet, which ballooned to more than $4.5 trillion after the central bank bought bonds to hold down borrowing costs, spur hiring and encourage spending in response to the 2007-2009 recession.

 "The thing to watch is: Is there a consensus around when they should allow the balance sheet to contract?'' Sweet said. Oubina, on the other hand, thinks it's unlikely that much detail will crop up just yet. He said he'd expect the Fed to wait until they're into the hiking cycle before turning to exit mechanics.

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