What is she thinking?

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What to Watch For in the Fed Minutes

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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The release of the minutes of last month’s Federal Reserve policy meeting on Wednesday could move markets, and understandably so. Fed officials continue to weigh a tricky balance between competing domestic and international influences on monetary policy as they contend with a number of economic puzzles.

QuickTake The Fed Lifts Off

And they are aware of the unhealthy hypersensitivity of financial markets to signals from several central banks that, in the last few years, have taken exceptional measures to repress financial volatility and boost asset prices as a way to tackle sluggish growth.

Here are four big issues to watch for in the March minutes:

  • To what extent do Fed officials see domestic economic developments compensating for -- and potentially overcoming -- deceleration elsewhere in the world? This is particularly important because, without the drag of the more sluggish global economy, the Fed would be on course to hike rates this year certainly more often than markets currently price in, and more often than the two times signaled by the bank’s latest set of “blue dots.”
  • How does the recent pronounced weakening of the dollar feed into the Fed’s assessment of future inflationary trends? Having welcomed the strong record of U.S. job creation, the Fed has focused more attention recently on the prospects of meeting its 2 percent inflation target over time. This is seen as an important input for determining the appropriate stance of monetary policy. A weaker dollar serves, albeit at the margin, to nudge up inflation -- as does, to a greater extent, the pickup in wage growth signaled by the jobs report last week.
  • Are Fed officials any closer to resolving some big economic puzzles that influence policy and their forward guidance? Three of these questions are particularly vexing given economic growth that has repeatedly disappointed both in its pace and its inclusiveness: the failure of wages to increase more robustly even with a series of strong monthly employment gains; unexpectedly low productivity growth; and a civilian labor-force participation rate and an employment-population ratio that are struggling to break free of multi-decade lows, suggesting a challenging mix of structural and cyclical headwinds.

In all this, market participants will focus on a key summary indicator as they analyze the minutes: They will try to discern whether Fed Chair Janet Yellen is able to maintain sufficient unity within the policy-making committee, which, understandably, will be inclined to arrive at different interpretations of the fluid and “unusually” uncertain prospects for the global economy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net