Fed: Counting the Minutes

Published on July 8, 2014

In anticipating the Minutes to the June meeting of the Federal Open Market Committee being released tomorrow afternoon, it is probably worth bearing in mind how closely Chair Janet Yellen has hued to the broader Committee consensus in her public remarks and testimonies.

So in light of her June meeting presser and her remarks last week at the International Monetary Fund, our first impulse is to expect few surprises Wednesday afternoon.

*** We do still suspect the great bulk of the meeting was occupied with the second round of lengthy discussions over the revisit to the Exit sequencing, the complicated technical issues, and the cost/benefits to each. As we wrote previously (see SGH 6/10/14, “Fed: Three Themes to June”), we doubt there will be any one single piece of the Exit agreed to until the whole of its architecture is agreed to, and that we think unlikely before the September meeting. Occam’s Razor is likely to prevail, with the simplest sequence probably seen as the most optimal. ***

*** That said, one thing we are curious about is whether there is any implicit tilt to the upside in the Committee’s perceived balance of risks that lies behind Chair Yellen’s repeated accent on the uncertainty in either direction to the Fed’s forecasts and rate projections. We do not think so, as it is just a bit too early, but it would be interesting to see how the market reacts in its pricing if such a hint, however slight, is taken from the Minutes, especially in light of the nothing but impressive Nonfarm Payroll print last Thursday. ***

The NFP Coloring of the Minutes

The impact of the NFP is undoubtedly lingering in the minds of many, perhaps inevitably coloring how the Minutes will be read. And what’s not to like: 288,000 jobs added in June with upward revisions in April and May, making for a 272,000 three month moving average in job gains, and a six month moving average of around 231,000 new jobs for a total of some 2.5 million jobs in the last 12 months.

It won’t be having quite the impact some market analysts are bantering about the Fed already at risk in falling behind the proverbial curve on inflation risks (it isn’t), but it is boosting the sense of confidence the accommodative policies to date are finally bearing fruit. It is also pushing the market to finally edge its rate pricing upward and closer to the Fed’s own “dot plot” which was leaving more than a few Fed officials a bit perplexed.

We suspect that the Minutes could reinforce that upward movement in yields and short pricing, if only in the sense the Minutes will make clear that in the very fact of the Exit discussions, it is by default affirming it is indeed expecting to be raising rates before too terribly long.

The Minutes, for instance, are likely to reflect what Chair Yellen described the Committee’s take on the curious downward revisions to first quarter GDP numbers, namely, that the “decline appears to have resulted mainly from transitory factors” and that “economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter.”

There is also likely to be further discussion over the below normal neutral rate and the various reasons why members feel it is declining (even hawks still hanging on to a 4% level have in fact come down from a previous levels of 4.25% to 4.5% from two years ago, so it is not like anyone is virginal on the issue). Likewise, the Committee is likely to have discussed the reasons behind the assumption of a gradual tightening trajectory.

There will no doubt be reasons offered for and against both, but that Chair Yellen seemed to go out of her way in not offering anything definitive on either suggests the Minutes won’t offer anything beyond a list of possibilities either. Why delve into it until the Committee has to, which is unlikely much before closer to the end of the year.

But where we suspect the Minutes may offer insights into the tone and tenure of the FOMC’s still evolving thinking and approach to the Exit is whether and how the productivity question may have already entered into the debate over inflation and wages.

Chair Yellen quickly tossed aside the hand wringing over near term inflation risks, pointing to the noise in the most recent price data. She and a majority of the FOMC fully expected the modest uptick in inflation attributed to a reversal of the unexpected downward pressure of falling medical costs last year. The uptick in inflation is a welcomed sign the low inflation fears are behind them.

It is a big bet, however, and not all the FOMC is happy with it. Higher wages will either have to come at the expense of lower profit margins or higher inflation that may come to look sustained, unless productivity in turn eventually begins to pick up.

There is always a lag to each and every correlation and causation ahead between wages, inflation and productivity, and this next layer of the debate between hawks and doves may already show up in Wednesday’s Minutes to the June meeting; and if it does, it could mean the clash and potential dissents to the unfolding policy path may be nearing sooner rather than much later.

Complacent on Complacency

Two other themes are likely to be evident in the Minutes and which dial back to how Yellen has been so careful to never stray too far from the Committee consensus. The first is how the FOMC is likely in the near term to respond to the market’s seeming complacency over those risks of an uncertain outlook or rate path projections.

One reason that Yellen seems so, well, complacent about the market’s current complacency is that the majority of Fed officials simply do not believe the market is going to become entrenched at these levels. Who knows what drives the stock market these days, but the more important bond market has already begun to move off its uber-dovish pricing relative to the Fed rate dots and there is no reason to believe there won’t be more of the same through the summer, assuming the handsome-looking data continues as expected.

If the stock market reaches even loftier levels even if wages begin to take an overdue larger share of profits — this is where the productivity question is again looming on the horizon — or if the bond market remains fixated at low yields and compressed spreads by this fall, it may finally trigger a sharper response from Yellen and other Fed officials. But for now, while being closely monitored, the market “complacency” is a lower priority in the scheme of things — for now, as we said.

The other is perhaps a hint at some of the possible reforms to make the blue dot plots of the rate paths in the Summary of Economic Projections more relevant and useful in framing the actual forward guidance of the statement.

While many have spent endless hours second guessing whose blue dot is whose, our sense is that the FOMC is still reluctant to either identify the blue dotters or to distinguish voters from non-voters or some such halfway measure. There is a view instead firming within the Committee that it would be a more useful exercise to track the evolution of each blue dot to the changes in the individual central tendency projections for growth, unemployment and inflation in a matrix of some sort.

That possible reform to the blue dots may or may not show up in the Minutes if it is not too early to do so, and it would be complicated to say the least. For that reason, it could well end up being turned over to the newly installed Vice Chair Stan Fischer, who in the footsteps of his predecessors Don Kohn and Yellen herself, may end up chairing another subcommittee on communications.

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