Fed Watcher’s Guide To FOMC Minutes

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

-- Lift-off timing: Any indication of how close the Fed is to its first interest-rate increase since 2006 is “the most important question” the minutes could answer, said Guy Berger, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut. The minutes could reveal a growing sentiment that Fed officials “feel like they are moving toward the lift-off date faster than they previously anticipated,” even if they “haven’t quite reached a consensus on it yet,” he said.

-- Updated FOMC forecasts for unemployment, inflation, and the federal funds rate released in June “suggest that there are certainly people, relative to where they were three or six months ago, who are more optimistic about the recovery,” Berger said.

-- The question is whether the views of hawkish FOMC members, who would rather see rates rise sooner, are “gaining much traction within the committee,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, and a former economist at the Federal Reserve Bank of Richmond.

-- “The majority view clearly is still very dovish, and I think still pretty relaxed about the rate outlook at this point,” Stanley said. Fed watchers will have to wait until the next FOMC meeting to see whether that view changes in light of the government’s employment report last week, which showed the jobless rate fell to an almost six-year low of 6.1 percent in June as payrolls grew in excess of 200,000 for a fifth straight month.

Labor Conditions

-- Indicators to watch: For Michael Hanson, senior U.S. economist at Bank of America Corp. in New York and a former Fed economist, the “most important insight” investors could glean from the minutes is what sort of labor-market conditions it would take for the doves on the committee to consider raising rates.

In March, with the unemployment rate at 6.7 percent, the FOMC dropped a pledge to keep borrowing costs low at least as long as unemployment was above 6.5 percent and the outlook for inflation didn’t exceed 2.5 percent. In its place, the committee substituted language saying rates would remain near zero “for a considerable time” after the Fed halts its program of bond purchases.

-- Policy makers, including Fed Chair Janet Yellen and New York Fed President William C. Dudley, “want a broader job market recovery, and the unemployment rate may misstate just how strong the recovery is,” Hanson said. “A little more detail about what they want to see” would be an important revelation from the minutes, he said. “Is it wage increases? Is it the participation rate going up?”

Inflation Views

-- Inflation debate: The minutes are likely to reveal a continued divergence in views on inflation as price increases have accelerated in recent months, according to Hanson. The Fed’s preferred measure of inflation showed prices were up 1.8 percent in May from a year earlier, compared with 1.1 percent in March.

-- Even before the jobs report for June, some committee members were probably ready to say “the labor market is tightening, slack is minimal, inflationary pressures are rising,” Hanson said.

-- For most Fed officials, though, the inflation debate will move “a little more toward the back burner,” said Terry Sheehan, an economic analyst at Stone & McCarthy Research in Princeton, New Jersey. Unease about too-high inflation in the future is “less immediate” than the committee’s recent concerns that inflation would “run too low for too long,” she added.

Communications Strategy

-- Revamping communications: In the absence of more clarity on the timing of the first rate increase, market participants have focused on FOMC members’ June forecasts, which projected higher policy rates at the end of 2015 and 2016 than their previous estimates in March. The Fed shows the projections as dots on a chart. Officials including Yellen and Dudley, who have cautioned against paying too much attention to the dots, may have discussed at the June meeting how to refine the way they communicate these forecasts to the public, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Fed economist.

-- “Certainly in March when they raised the dots, there was some discussion about how the market would perceive it, and I think we could see that again, given the dots moved up again in June,” said Feroli. Yellen’s emphasis on the uncertainty surrounding Fed forecasts at the press conference following the June meeting “was probably related to concerns that the dots aren’t being properly processed by the market,” he added.

Ending Purchases

-- QE end date: Fed officials may indicate a preference for concluding asset purchases in October versus December. The committee has reduced bond purchases by $10 billion at each meeting since December. If it maintains that pace, it will have to choose between ending the program with a final $15 billion purchase in October, or continuing it until December, when it would make a last purchase of $5 billion.

-- “I’m sure there are participants who favor winding it up sooner, and that will be expressed in the minutes,” said Stone & McCarthy’s Sheehan.

Planning Exit

-- Exit strategy: The minutes may offer details on how the committee is preparing for next steps in the process of exiting from extraordinary monetary stimulus, said Berger at RBS.

-- Fed officials may have discussed at the June meeting whether they will act to raise the federal funds rate, which has averaged about 0.08 percent over the last year, to the top end of the current target range of zero to 0.25 percent before they announce a higher target, Berger said.

-- Officials may also discuss whether the target for overnight loans among banks should continue to be in a range or expressed as a single percentage level, he said. “Given that we are arguably 12 to 15 months away from that first hike -- and of course, some people believe even sooner,” these technical issues “are starting to matter,” he said.

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