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Comment: The upcoming minutes of January 29-30 FOMC meeting may not have much new to offer

The Fed will release the minutes of the January 29-30 FOMC meeting on Wednesday, February 20 at 14:00 ET. The content of the discussions will reflect conditions three weeks ago when the federal government was just getting back to work after the shutdown, and hope was moderate for avoiding another shutdown after the February 15 negotiations deadline. Expectations were that negative impacts for growth in the first quarter would be largely – but not completely – erased over the coming weeks.

Chair Powell gave a top level assessment of the FOMC’s views on the risks facing the economy in his remarks and in the Q&A in the press briefing after the meeting ended on the 30th. Between the meeting statement and Powell’s comments, it was clear that the outlook for monetary policy had taken a more dovish turn in regard to future interest rates and that the normalization of the balance sheet was likely to finish sooner than previously expected. The change in the outlook was sufficient that it prompted the FOMC to reiterate its Longer-Run Goals and Policy Strategy — in spite of the fact that it was essentially unchanged — and a Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization.

In the three weeks since January 30, Fed officials have broadly confirmed that this is the consensus of FOMC participants. As such, the minutes are not expected to provide any fresh insights. There may be a hint that at least some policymakers have downgraded their forecasts for the economy this year and perhaps next. However, there will be no hard numbers to concretize this until the next Summary of Economic Projections (SEP) is updated and released after the March 19-20 FOMC meeting.

Powell emphasized that short-term rates were and will be the main instrument of monetary policy and downplayed the role of the balance sheet although he made it clear that it remains in the toolbox. The material that accompanied the FOMC statement was a formal announcement that it was adopting the “floor” or “abundant reserves” approach to monetary policy rather than returning to the former “corridor” system. The minutes may offer some further detail on this. The ultimate size and composition of the balance sheet has not been determined. The minutes probably won’t offer much guidance beyond that an earlier end to the taper is under consideration. It itself this is a solid hint to expect something within the next few meetings.

There may be some more tangible concerns that inflation is starting to decline below the symmetric 2% objective on the part of the policymakers more sensitive to the Fed’s credibility on defending its inflation target. These should be tentative in light of the fact that much of it will be due to the rapid declines in energy prices in late 2018 that have since flattened out. In any case, the FOMC often refers to swings in energy prices as “temporary”, “transitory”, or short-term “special factors”.  Core inflation measures – which could not include the Fed’s preferred PCE deflator measure due to the shutdown – were still close enough to target not to raise loud alarms. Consumer and business inflation expectations were a bit lower, but not significantly at that time.

Risks to the outlook remain much as outlined by Powell in his press briefing, mainly slower global growth, and greater uncertainty for fiscal and trade policy. Volatility in stock markets had lessened by the time of the last meeting and financial conditions overall show less stress. There may be greater detail on the risks in the minutes.

What may prove most interesting in the minutes is if there is any technical discussion of how best to wind down the balance sheet normalization, how the IOER is performing relative to maintaining a floor on short-term rates, and what forums will be used for public discussion and communication of any potential changes to the framework of monetary policy.

 

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