Fed to Release Meeting Minutes: What to Watch
May 22 2019 - 5:59AM
Dow Jones News
By Nick Timiraos
The Federal Reserve releases the minutes of its April 30-May 1
meeting on Wednesday at 2 p.m. EDT, offering new clues about how
officials assessed an unexpected downtick in inflation during the
first quarter.
Officials have signaled they are done raising interest rates for
now, putting more attention on whether their next move might be to
lower interest rates. Here's what to watch:
The Lowflation Equation
Fed Chairman Jerome Powell, at his May 1 press conference,
played down concerns that recent low inflation might hint at either
broader economic weakness or interest rates set too high. Excluding
volatile food and energy categories, prices rose 1.6% in March from
a year earlier, according to the Fed's preferred inflation gauge,
down from 1.8% in January and 2% in December.
Mr. Powell pushed back against market expectations of a
potential rate cut this year when he characterized the recent trend
as transient, roiling the markets because he had earlier signaled
greater frustration about low inflation in March.
The minutes will shed more light on how the rest of his Fed
colleagues viewed the inflation outlook at their recent meeting.
Agreement with Mr. Powell's outlook would suggest a higher bar for
a rate cut and greater comfort in their make-no-changes
posture.
Any skepticism by policy makers about the temporary nature of
weakening inflation could augur more difficult debates at future
Fed policy meetings.
Policy Perspectives
Even if officials did signal greater concern about soft
inflation, that alone doesn't suggest they would support a rate
cut. In an interview last month, Chicago Fed President Charles
Evans said he would consider lowering interest rates if inflation
remained stubbornly below the Fed's 2% target for several months,
though he said this wasn't the outcome he expected.
Comments from his colleagues before and after the latest Fed
meeting suggests this is a minority view for now. Fed governor Lael
Brainard last week said she would favor a so-called "opportunistic
reflation." The Fed would seek to boost households' and businesses'
expectations of future inflation by signaling a stronger commitment
to allow inflation to rise above 2% for "a couple of years."
And still more officials, including Fed Vice Chairman Randal
Quarles and Kansas City Fed President Esther George, have signaled
they aren't particularly troubled by inflation running a few tenths
of a percentage point below target in the current environment.
Growth Story
Any discussion in which officials reassess the potential of the
economy to expand or the unemployment rate to drop without
generating more inflation would signal greater conviction that the
Fed doesn't need to raise interest rates.
At the same time, any discussion about trade tensions at this
meeting are likely to be stale by the time the minutes are
released. Since the Fed last met, trade talks between China and the
Trump administration have broken down, with Washington raising
tariffs on roughly $200 billion in goods to 25% from 10%, a major
escalation.
Composition Questions
At the latest Fed meeting, officials began a formal discussion
over what types of Treasury securities they should hold once their
asset portfolio stops shrinking and begins increasing again. The
portfolio runoff will end in October, and officials have decided
that, for now, they will reinvest maturing Treasury securities and
the principal of maturing mortgage securities into new Treasurys
that reflect the outstanding issuance of such debt by the U.S.
Treasury Department.
They haven't decided to stick with that approach for the long
run. Fed policy in the past decade operated on the theory that
holding long-term securities stimulates financial markets and the
economy by holding down long-term rates, while holding shorter-term
securities provides little stimulus. Right now, the Fed isn't
buying any short-term Treasury bills.
Before 2008, the Fed held a higher proportion of
shorter-maturity securities than the outstanding market did. Some
officials have indicated they would prefer to return over time to
this composition because it would be easier to shift back into
longer-term securities to stimulate growth in a downturn.
But others have warned that a portfolio weighted toward
shorter-term securities could tighten policy more than might be
appropriate, depending on how quickly the Fed returns to such an
equilibrium. The minutes could shed more light on which of these
two camps has more support for now.
Operational Matters
In April, movements in short-term money markets caused the Fed's
benchmark federal-funds rate to drift closer to the top of its
target range between 2.25% and 2.5%. As a result, officials at the
latest meeting agreed to lower the rate the Fed pays banks on
deposits, or reserves, held at the central bank to 2.35%, from
2.5%.
Mr. Powell has indicated the Fed will discuss later this year
proposals to devise a new market facility to reduce volatility in
demand for reserves. The minutes could show whether those
discussions have gotten off the ground.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
May 22, 2019 05:44 ET (09:44 GMT)
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