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)

Copyright (c) 2019 Dow Jones & Company, Inc.