economics

Fed Minutes to Detail Views on Inflation Overshoot, Yield Curve

  • Could give explanation for FOMC’s second ‘symmetric’ reference
  • Records may affect expectations for number of 2018 rate hikes
Pinebridge’s Omar Slim discusses how geopolitical or trade tensions might affect markets, and talks about Treasuries.

Divisions among Federal Reserve officials over the yield curve and inflation will be under scrutiny on Wednesday when the U.S. central bank releases minutes of its policy meeting at the start of the month.

While the Federal Open Market Committee left interest rates unchanged at the May 1-2 session, new information on how officials discussed those topics could help analysts gauge how many additional hikes are likely this year. The Fed lifted its benchmark rate in March and another move is widely expected in June. Odds are currently about split between the probabilities for three and four increases over the year as a whole, according to pricing of federal funds futures contracts.

“We’ve heard a lot of Fed officials say they were comfortable with an overshoot of inflation” above the central bank’s 2 percent target, said Joseph Song, senior U.S. economist at Bank of America Corp. “Some others are worried higher inflation could lead to a de-anchoring of inflation expectations. That’s a debate I hope is in the minutes.”

The record of the closed-door meeting, to be published at 2 p.m. in Washington, may also reveal why officials decided to make a subtle but widely noted change in the May 2 FOMC statement, adding a second reference to the “symmetric” nature of the Fed’s inflation target. The Fed has used that term in every FOMC statement since March 2017. By inserting it a second time, policy makers seemed to signal a relaxed view over the prospects of inflation moving above target in the coming months.

“I’m not 100 percent sure why they did that,” said Thomas Simons, senior economist at Jefferies LLC. “I’ll be looking for some discussion on why it was necessary to reinforce to the market that the target was symmetric.”

In March FOMC members’ median forecast projected core and headline inflation will be 1.9 percent at the end of 2018. But the Fed’s preferred measure of price pressures showed inflation had already reached 2 percent in the 12 months through March. Its core version -- which excludes volatile food and energy components -- hit 1.9 percent.

Another debate among officials likely centered on what to make of a flattened yield curve -- or a shrinking gap between the yield on long-dated Treasury bonds above the yield on short-term securities. That spread -- which turned negative in the run-up to every recession in the past 40 years -- has narrowed in recent weeks to the smallest since 2007.

At least three committee members -- including St. Louis Fed President James Bullard, Atlanta’s Raphael Bostic and Minneapolis President Neel Kashkari -- have pointed to the flatter curve as a reason why the Fed should proceed cautiously with additional rate hikes. Others, like San Francisco chief John Williams, who will take over the New York Fed next month, and Boston’s Eric Rosengren, have expressed much less worry.

The yield curve “is one of the few indicators that has been reliable in predicting recessions,” said Dean Maki, a former Fed staffer and now chief economist at Point72, an asset-management firm based in Stamford, Connecticut. “It may be useful to see how much of the committee is concerned about that issue.”

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Economists had lower expectations for any real progress on a topic that the FOMC first broached at the March meeting. At that session, participants discussed the possibility of revising statement language “at some point” to acknowledge that monetary policy “would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity,” according to minutes.

“I don’t think they know where neutral is yet,” Simons said. “If they were to put more emphasis on that, it means they think they’ll reach it relatively soon, and I don’t think they necessarily want to signal that yet.”

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