By Nick Timiraos 

The Federal Reserve releases the minutes of its Jan. 28-29 meeting on Wednesday at 2 p.m. EST, which are expected to shed light on how central bank officials considered their approach to interest rates last month.

Officials voted to hold their benchmark rate steady in a range between 1.5% and 1.75% at the meeting after cutting the rate three times last year. Here's what to watch for:

Viral Worries

Financial markets started 2020 ebullient due to a trade truce between the U.S. and China and glimmers of firmer global manufacturing activity. But fears about China's coronavirus outbreak reignited global growth worries in the week or so before the Fed's January meeting.

The minutes, released with their customary three-week delay, won't reveal officials' most recent thinking on how they might react if the global economy slows because of quarantines within China and suspended air travel in and out of the country. Fed Chairman Jerome Powell told congressional lawmakers last week the central bank was "carefully monitoring" the situation, singling out a risk that makes it more likely to lower interest rates than to raise them.

Central bankers around the world moved aggressively last year to provide stimulus to cushion the global economy from slower growth amplified by trade tensions. So far this year, they have signaled caution about how and when they might take action in response to a coronavirus-related slump in global activity and demand.

The Inflation Equation -- and Framework

The minutes could show whether officials revised their outlook for inflation in the coming year. The central bank was surprised last year by a downward drift in its preferred inflation gauge below the Fed's 2% target, though other measures show somewhat firmer price pressures.

Officials have said they expect inflation to firm up on a year-over-year basis in the coming months because of weak readings from last year. But questions remain over what will happen to inflation after that and what, if anything, the Fed should do to push prices up faster after years of inflation running below its goal.

Meanwhile, the Fed continued discussions last month on its inflation-targeting framework. Even though conclusions aren't expected for several months, the minutes could indicate how much progress officials have made in forging consensus on a new framework that might be more relaxed about encouraging or accepting inflation running a little above 2% during good economic times to make up for running below the target when the economy is weaker.

Given the continuing review, officials decided last month not to release their annual statement on longer-run policy goals this week, as they typically do each January.

Reserve Balances

Mr. Powell said at his January news conference the central bank would continue to intervene in money markets and purchase Treasury bills to boost the supply of bank deposits held at the Fed, known as reserves, until those reserve balances were "durably ample." To do this, he said the Fed wanted to make sure reserves stay above $1.5 trillion.

The minutes could shed light on a number of debates within the rate-setting Federal Open Market Committee, including what actions could be taken to reduce demand for reserves. While the committee has previously debated the idea of launching a new standing facility, several officials have suggested they would prefer to employ other measures to make it easier for reserves to flow more freely within the financial system.

Some officials have expressed a strong preference for maintaining as small an asset portfolio, or balance sheet, as is necessary. That goal could add an extra degree of difficulty to the Fed's current effort to avoid a rerun of last September's money-market volatility because allowing reserve balances to shrink as low as they did -- below $1.4 trillion -- has been identified by officials as a key culprit in the rate-spike episode, during which the cost of borrowing overnight jumped.

For months, the Fed has supplied as much as $200 billion in reserves by accepting Treasury and mortgage securities as collateral in overnight and short-term loans called repurchase agreements, or repo. It has also been buying $60 billion a month in Treasury bills to add reserves and, in the months ahead, to gradually eliminate the need for repo lending.

Officials have committed to purchasing bills into the second quarter. But they haven't said when they might reduce the pace of those purchases or when they will transition to a permanently lower level of purchases -- private sector analysts estimate around $10 billion to $15 billion a month -- to keep up with normal growth in currency in circulation and other Fed liabilities. The committee has often used the minutes to provide new clues about such technical decisions.

Financial Stability

Mr. Powell has said repeatedly the bill purchases aren't the same thing as the Fed's post-2008 policies to stimulate growth by buying Treasury securities and mortgage bonds known as quantitative easing, or "QE." But a market rally between October and January led commentators to argue that the purchases were akin to QE, raising concerns from at least one Fed bank president about the large, temporary growth of the central bank's balance sheet.

The debate over this matters because if investors believe these policies are providing support to financial markets, that could complicate efforts to phase them down this spring or summer. The minutes could show the degree to which officials are concerned that the Fed's balance sheet growth or the level of interest rates are creating asset bubbles or other financial excesses that require changes to monetary or regulatory policy.

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

(END) Dow Jones Newswires

February 19, 2020 05:44 ET (10:44 GMT)

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