The FOMC minutes will be released in just a few minutes (2pm EST).
There will be a lot of parsing given the importance of the last meeting (first time publishing projections for the fed funds rates, extending the low rates language to late-2014, etc). The minutes will probably have the same dove-ish and recent-improvement-undermine-y tone that was embedded in the statement. But given the number of members that believed it appropriate to start tightening before late-2014, there’s a chance we’ll at least glimpse some signs of disagreement.
Goldman Sachs economists had a good roundup of questions to keep in mind when the statement came out, but we’ll just highlight the following two.
The first issue slipped by us at the time, to be honest:
Q: Will we find out whether the phrase “exceptionally low levels of the federal funds rate” has been reinterpreted from “rates will stay at the current level” to “rates will stay below 1%”?
A: We think it has not been reinterpreted, but are unsure whether the minutes will provide complete clarity. In his speech at the 2011 Jackson Hole conference, Chairman Bernanke said that the phrase “exceptionally low…until at least mid-2013″ meant that the funds rate “would be held at its current low levels for at least two more years.” For the time being, this ended a low-level debate among Fed watchers whether the “exceptionally low” language really meant “no hikes” or whether it might be consistent with a small increase in the funds rate.
However, this debate has sprung back to life in the wake of Bernanke’s rather ambiguous remarks at the January 25 press conference. In trying to square the guidance in the FOMC statement that rates would stay exceptionally low through late 2014 with the SEP projections showing that only 6 out of 17 participants projected an unchanged funds rate by the end of 2014, Bernanke said that the FOMC statement wording was “…supported by the observation that 11 of the 17 participants expect the funds rate at the end of 2014 to be 1 percent or less, and so presumably the takeoff would not be much earlier than that.” This muddies the waters, because it makes it sound as if a small hike of up to 1% might be consistent with the “exceptionally low” language after all.
So what is going on? We think that the chairman did not mean to reinterpret the language, but simply tried to downplay the differences of opinion within the Fed while on the press conference podium. We admit that our interpretation largely rests on our view of what would the sensible thing to do.
We think it would be quite odd for the chairman to expand the length of the FOMC rate guidance but then to immediately blunt the force of this bold move by backing away from the meaning that he himself had clarified just a few short months earlier. We hope that the minutes will clear up this point, but are frankly unsure whether this will happen.
And then there’s the more obvious but contentious issue of whether we’ll learn anything about the possibility of QE3, and what it might look like (MBS vs Treasuries, what would be needed to trigger it, etc):
Q: How much will we learn about the likelihood of additional monetary easing?
A: We think additional easing remains likely, but we don’t think that the minutes will provide complete clarity.
We believe that the chairman and the FOMC leadership more broadly are strongly considering additional easing. The best piece of evidence was Chairman Bernanke’s answer to a question by Zachary Goldfarb of the Washington Post in the press conference, which said that “if recovery continues to be modest and progress on unemployment very slow, and if inflation appears to be likely to be below target for a number of years out—so the configuration we’re talking about in the projections—then I think there would be a very strong case, based on our framework, for finding a different—additional tools for expansionary policies or to support the economy.” (Emphasis ours.)
In other words, the chairman believes that the committee should ease further if the economy evolves in line with the committee’s expectations, and the rest of the Fed leadership presumably agrees with him.
That said, additional easing is not a certainty yet. After all, the January employment report and the recent jobless claims data suggest that “progress on unemployment” might end up being better than “very slow.” Moreover, even if the Fed leadership believes that additional easing is likely to be warranted, this does not necessarily mean that either the minutes or the discussion of the outlook for the balance sheet in the SEP will provide complete clarity. For one thing, the leadership might not want to fully commit itself yet. For another, it is clear that there are many FOMC meeting participants–especially outside the leadership and among the nonvoting presidents–who are unconvinced that additional easing will be warranted. The anonymous nature of the minutes could make these differences of opinion seem more important than they really are.
So what are we likely to see in the minutes and the discussion of the outlook for the balance sheet? Our expectation is that “several” members indicated an expectation of additional balance sheet increases, but that “others” indicated a much earlier onset of balance sheet reductions (including via the “roll-off” of securities from the balance sheet). This would be consistent with the fact that three FOMC meeting participants projected an increase in the funds rate in 2012 and another three projected an increase in 2013. Overall, we believe the minutes will reinforce the market’s current belief that additional easing is a strong possibility but not yet a “done deal.”