INVESTORS MAY have moved on from the Federal Reserve’s December policy meeting after Chairman Jerome Powell offered more-soothing remarks two weeks later, saying the central bank is “prepared to adjust policy quickly.”
But don’t dismiss the minutes of the session, which are due out at 2 p.m. Wednesday in Washington. The report may provide important clues about the level of solidarity among officials at the Dec. 18-19 Federal Open Market Committee (FOMC) meeting, when policy makers raised interest rates and forecast further increases despite plunging stocks and pressure from President Donald Trump for a halt.
“These minutes will still be relevant because they’re going to give us a sense of the debate within the FOMC,” said Michelle Meyer, head of US economics at Bank of America Corp. Rate moves are “still a committee decision, and understanding the division of views on the committee is important,” she added.
Here are four things economists will be looking for:
WHY ‘FURTHER GRADUAL?’
While an interest-rate hike had been fully anticipated by investors, many Fed watchers had expected the FOMC’s post-meeting statement would turn more dovish by dropping altogether the long-standing call for “further gradual increases.” Instead, officials merely tweaked the language to say “some further gradual increases” were still in their outlook.
“I’m sure there was further discussion about the ‘some further gradual,”’ said Sarah House, senior economist at Wells Fargo & Co. “Maybe it will show some reasons why they kept it in, or how close that decision was.”
BALANCE OF RISKS
Similarly, the committee stuck with an assessment that risks to their economic outlook were “roughly balanced.” Fed officials did add here that they would “continue to monitor global economic and financial developments,” but they might have gone further, acknowledging that risks had tilted to the downside, as many in financial markets believe.
Again, details of any debate around that decision could be illuminating. In addition, Jennifer Lee, senior economist at BMO Capital Markets, said she’s hoping for more information on what specific risks policy makers see as most prominent. For example, how much are they worried about softer growth in China or in Europe, and to what extent is the former driven by, or independent of, the ongoing trade war?
FINANCIAL CONDITIONS
Economists are also keen for details on how Fed officials viewed the tightening of financial conditions, which included a precipitous drop in stocks.
“I’ll be very interested in the paragraphs that talk about market events leading into the meeting, and were there concerns that the decision should have been altered,” said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago.
The Fed’s rate hike was unanimously approved by the FOMC’s 10 voters, Tannenbaum said, “but beneath the surface there may be churn, and it will come out in the debate over how seriously to take market conditions.”
BALANCE SHEET
Economists would also welcome any signal on what officials plan to do with the Fed’s balance sheet, and on two levels.
Powell’s comments on Jan. 4 were reassuring to financial markets, in part because he said the Fed’s policy flexibility extended to the ongoing balance-sheet runoff, currently capped at $50 billion per month. Before last week, including at his Dec. 19 press conference, Powell had consistently said the balance-sheet trimming was “on autopilot.”
The minutes could show whether any officials were already calling for a rethink of that stance.
Second, market participants are hungry for a signal about the Fed’s long-term plans for sticking with its current set of tools for controlling short-term interest rates, or shifting back to a system based on a far leaner balance sheet. It’s not clear if that will come in the minutes, though.
“They are way overdue” in communicating more about which regime they’ll go with, Meyer said. — Bloomberg

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