By Nick Timiraos 

The Federal Reserve on Wednesday will offer more details on policy makers' outlook for 2018 when it releases the minutes of their Jan. 30-31 meeting. Officials voted then to hold their benchmark federal-funds rate steady in a range between 1.25% and 1.5%.

Two important developments have transpired since the meeting. Stocks plunged and then stabilized, bond yields rose and market volatility soared in early February. Also, Congress approved a bigger-than-expected government funding bill for this year and next.

The minutes, to be released at 2 p.m. EST, will show how Fed officials judged the economy and their policy path before those developments. Here's what to watch:

Fiscal Policy

Fed officials met in December and updated their latest economic projections before congressional Republicans finalized their $1.5 trillion tax cut package.

The January meeting minutes could reveal how officials expected the tax bill to ripple through the economy and how that might alter their plans to raise interest rates this year. The enacted bill was both larger and more likely to boost the economy sooner than the version being debated when officials submitted their growth projections in December.

The funding agreement to increase federal spending by $300 billion over two years was approved by Congress about a week after the January Fed meeting. The minutes could show whether Fed officials had begun to anticipate how a spending deal might affect their economic forecasts and rate plans.

The Path of Rates

Fed officials in December penciled in three rate increases for 2018 and two for 2019.

They are likely to raise the fed-funds rate by a quarter percentage point at their next meeting in March.

The big question for investors now is whether officials might move more than three times this year, particularly if they see signs inflation could rise above the 2% target in the coming year.

Over the past year, officials have described the risks to their outlook as roughly balanced, meaning the prospects of growth that is either stronger than anticipated or weaker than anticipated are about the same.

The minutes could show whether officials were starting to rethink this so-called "balance of risks" language, perhaps with some seeing growing odds of positive surprises.

'Further' Explanations

Fed officials in their January policy statement made two small tweaks that generated significant confusion. Rather than describing economic conditions as warranting just "gradual increases" in the fed-funds rate, officials in two places added the word "further" before "gradual increases."

The language suggested officials had grown more confident about the need to raise short-term rates several times this year, but communicated this in a way that didn't convey some dramatic new intention. In other words, it looked like a small step -- as opposed to a giant leap -- in the direction of having greater confidence in the economic outlook. It's possible, of course, that officials meant something different, and the minutes would be one place to set markets straight on what they meant.

Inflation Outlook

Inflation's stubborn softness last year puzzled Fed officials, who attributed most of the weakness to transitory factors. The minutes could show whether they've grown more convinced of this explanation.

Officials said in December they didn't revise up their projections for rate increases in 2018, even though they raised their growth forecasts, because inflation had been soft. The January meeting minutes also could show whether they're willing to take a similar wait-and-see attitude about the effect of the tax cuts on inflation.

Asset Valuations

For months before the recent bout of market volatility, some Fed officials had voiced concerns that relatively low bond yields, rising stock prices and other signs of easing financial conditions had been undercutting the central bank's efforts to tighten them.

The minutes should show whether officials were growing more anxious at their January meeting, and possibly how they might have viewed the selloff that followed.

New Frameworks

The January meeting was the last chaired by Janet Yellen, and investors are keen for any clues about possible policy changes in store under her successor, Jerome Powell.

For example, did officials discuss whether they might consider possible alterations to their inflation-targeting framework or the ways they communicate with markets and the public? The minutes would be one place for such conversations to surface publicly.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

February 21, 2018 05:44 ET (10:44 GMT)

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