Whom to Listen to in the Fed Minutes

The  members, who have a vote, matter more than the participants, who don't.

Leading the discussion.

Photographer: Aaron P. Bernstein/Bloomberg

When it comes to the meetings of the Federal Open Market Committee, not all central bank policy makers are created equally. There are “participants” -- all the policy makers in the room -- and there are “members,” those who have a vote. It is important to keep this distinction in mind when reading the minutes of the FOMC meetings -- especially because many of the more hawkish members of the Fed are participants, not members.

Expectations of a rate hike in March hardly budged after the release of the most recent Fed minutes. This was a key line:

Participants generally indicated that their economic forecasts had changed little since the December FOMC meeting.

Little change in the economic forecast implies little change in the rate forecast, too. So the median projection of three 25 basis-point rate hikes for 2017 remained intact. And I tend to view that median as really two hikes with an option on a third. The most likely outcome then would be rate hikes in June and December, with maybe another in September. Given that officials see little change in the economic forecast, this schedule remains reasonable.

One could, however, focus on this:

In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee's maximum-employment and inflation objectives increased. A few participants noted that continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the Committee greater flexibility in responding to subsequent changes in economic conditions.

What is “fairly soon”? And at what “upcoming meeting”? My interpretation is that a sizable contingent of participants see a rate hike before June, with a few as early as March.

This indeed sounds fairly hawkish. Here, however, it is important to examine how members rather than participants viewed the situation:

Many members continued to see only a modest risk of a scenario in which the unemployment rate would substantially undershoot its longer-run normal level and inflation pressures would increase significantly. These members expressed the view that inflation was likely to rise toward 2 percent gradually, and that policymakers would likely have ample time to respond if signs of rising inflationary pressures did begin to emerge.

“Many” members saw little risk of undershooting the unemployment target or overshooting the one for inflation. And even if such a risk did emerge, they have time to alter policy accordingly. Hence, although a group of participants may be looking for a hike sooner rather than later, the voting members are not in any rush. Of course, there were other opinions:

Other members indicated that if the labor market appeared to be tightening significantly more than anticipated or if inflation pressures appeared to be developing more rapidly than expected as resource utilization tightened, it might become necessary to adjust the Committee's communications about the expected path of the federal funds rate.

A subset of the group were more concerned that the Fed needs to accelerate the timing of the next rate hike, but the January employment report, with its higher unemployment rate and softer wage growth, would temper their concerns. So this does not appear to argue for a March rate hike. Finally:

One member noted that, even if incoming data on the economy and inflation were consistent with expectations, taking the next step in reducing policy accommodation relatively soon would give the Committee greater flexibility in calibrating policy to evolving economic conditions.

So even though "many" participants appeared interested in moving rate hikes forward, "many" members “many” were comfortable with the expected pace of tightening, “some” might be somewhat more cautious but as of now their concerns appear to remain unfounded, while only “one” is looking to hike soon.

What is happening is that the committee members lean dovish, especially now that Minneapolis Federal Reserve President Neel Kashkari and Chicago Federal Reserve President Charles Evans have rotated onto the FOMC. That means the hawkish-leaning policy makers are more likely to be participants than not. Thus focusing on the participants' discussion will give a more hawkish impression of Fed policy compared to the discussion of committee policy action.

Overall, the minutes leave my assessment of the upcoming meeting little changed. Odds favor that the Fed will hold rates steady in March – the data largely confirms the existing forecasts and seems consistent with views of much of the committee that there is no need to rush rates. To be sure, upcoming inflation and employment reports could alter that outlook and pull the next rate hike forward. But given the cautious approach of committee members, stronger data might be pulling a June hike to May rather than all the way to March.

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

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