Fed Minutes Could Provide Clues on Economic Outlook, Balance Sheet
19 February 2020 - 9:59PM
Dow Jones News
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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