Fed: The Minutes

Published on February 19, 2014

We do not expect a lot of surprises when the Minutes to the Federal Open Market Committee’s January meeting are released tomorrow afternoon. For one, Chair Janet Yellen’s Monetary Policy Report testimony last week stole any of the potential thunder and her theme in any case was one of a “things look OK so far” continuity.

*** The main thing we will be looking for is evidence of concerns over the persistence of the low inflation last year, and whether inflation is gaining a larger role in the coming update to the Fed’s forward policy guidance. If the FOMC is looking past the recent weak data as we expect it is, the better looking growth and highly accommodative policy stance should likewise see at least a modest pick up in inflation. The inflation narrative seems destined to frame much of the policy debate this year, and the Minutes may also see some discussion of how inflation could or should figure more prominently in the looming revisions to the forward guidance. ***

*** On that note, the weaker data let the FOMC off the hook in needing to update its current forward guidance right away, but forward guidance was no doubt a main topic of discussion with Committee members probably laying out ideas on where to take the guidance now that the crossing of the unemployment threshold is nearing. While no firm consensus looks to have emerged, the Committee does seem to be edging towards a normalization of the guidance in describing the forecasted conditions under which the Fed expects to shift its policy stance that is in neither calendar-specific nor framed in numerical terms. ***

And on other themes:

The ongoing debate over the labor market trends and whether the decline in the labor participation rate is structural or cyclical is also certain to fill multiple paragraphs of the Minutes, with the strongest voices given to the former over the latter. That said, the FOMC is likely to have still concluded the absence of any significant wage growth suggests it still has some running room with its highly accommodative policy stance.

As we have previously noted (SGH 2/7/14, “Fed: NFP and Next Week’s Testimony”) and above, we also expect the FOMC to affirm they are going to be looking past the spate of weak data points that started to surface before the meeting. That means a central tendency forecast for the year holding at 3% plus on the other side of the current softness, and the Minutes may indicate an equal expectation to look past any strong rebound once the winter cold clears.

The discussions are also unlikely to indicate any serious thought to easing back on the pace of the measured taper in the monthly bond purchases. The bar is set pretty high.

One last thought is whether much time was taken in going through the annual Statement of Longer Run Goals and Monetary Policy Strategy. It doesn’t look like there were any changes to the text judging by its inclusion in the report submitted to Congress last week.

But still, its key clause that the Fed will be “taking into account the magnitude of the deviations and the potentially different time horizons” for employment and inflation to return to longer run projections will loom large if and when the moment comes the Fed is asserting the credibility to pursuing a lower and slower rate tightening trajectory.

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