Minutes from the Federal Reserve’s latest policy meeting could shed light on how central-bank officials are wrestling with applying their new policy framework to an economy battered by the coronavirus pandemic.
Here is a look at what to watch in the minutes, which will be released Wednesday at 2 p.m. Eastern time.
Fed officials laid out a three-part test that must be met before they consider lifting short-term rates from near zero. First, they need to be satisfied that labor-market conditions meet their maximum employment goals, which weren’t spelled out. Second, inflation must have increased to 2%. Third, they will need some evidence—from forecasts or market-based measures—that inflation will continue to run moderately above 2%.
The minutes could spell out in greater detail how officials arrived at this formulation and the degree of consensus behind it. Dallas Fed President Robert Kaplan dissented from the decision because he favored less precise guidance, while Minneapolis Fed President Neel Kashkari preferred a bolder version. The minutes could show whether other, nonvoting reserve bank presidents had reservations.
At their June 9-10 meeting, Fed officials thought the central bank would need to “provide more clarity regarding purchases of Treasury securities and [mortgage bonds] as more information about the trajectory of the economy becomes available,” according to minutes of that meeting.
Officials provided a slight clarification last month by stating that these purchases, initiated in March with the stated goal of repairing market functioning, were being maintained now to support a faster economic recovery. Since mid-June, the Fed has been purchasing $80 billion a month in Treasurys and $40 billion a month in mortgages, net of redemptions, down from even larger quantities in the spring.
Reframing the reasons for these purchases has done nothing to elucidate the circumstances under which the Fed might adjust the bond purchases, and the minutes will show whether officials have begun to entertain such questions, which are of intense interest to bond markets.
These questions include whether and how to link guidance about rate plans to the pace of asset purchases and whether to shift purchases of Treasurys to longer-dated securities, as the Fed did during its 2012-14 bond-buying program. Currently, the Fed is purchasing a wider range of short-, intermediate- and long-term securities.
New projections released at last month’s meeting show officials expected a somewhat stronger economic rebound this year and a speedier drop in the unemployment rate than they did in June. But there was still considerable uncertainty over the path of the virus and its implications for growth, hiring and loan losses that could weaken the financial sector.
The prospect of delayed or reduced fiscal support from Congress and the White House is also a big wild card for the outlook, and the minutes could show the degree to which officials’ modestly improved forecasts rely on additional spending in Washington.
Last month’s meeting was the first since officials in August announced their revised rate-setting framework, which calls for periods of inflation above 2% following intervals like the current one, in which inflation runs below that target and interest rates are pinned near zero.
Investors are keen for further details about what, exactly, officials regard as a “moderate” overshoot of inflation and how long they might be comfortable with one.
So far, most officials have shied away from providing such specifics, emphasizing they aren’t following a mechanical rule to anchor inflation expectations and instead want to maintain flexibility. But eventually, they will need to spell out such criteria, and the minutes would offer an opportunity to share their thinking.
At their July 28-29 meeting, Fed economists described financial vulnerabilities as “notable,” an unusually explicit assessment of such risk. The minutes could show whether such concerns were more broadly shared by officials who set policy as well as any implications for the economic outlook in the months ahead.
The Fed’s board of governors, which is separate from the rate-setting Federal Open Market Committee, voted last month to maintain restrictions on dividends and share buybacks of the largest U.S. banks for at least another three months.
Write to Nick Timiraos at [email protected]
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