Fed Watcher’s Guide to Minutes: Exit Strategy, Employment View

[thenews]

Here’s what to look for when the Federal Reserve releases minutes from the Federal Open Market Committee’s April 29-30 meeting at 2 p.m. in Washington.

-- Exit strategy: The minutes may show that Fed Board members discussed possible changes to the central bank’s strategy to exit from record stimulus, according to Bank of America Corp. economists led by Ethan Harris, co-head of global economics research. The strategy lays out the sequence of steps for shrinking the balance sheet and raising interest rates.

-- “If we do get comments around the exit strategy, we would expect the Fed to reiterate that it is likely to hold most of its assets to maturity rather than sell,” Harris said in a research note. The central bank may also indicate it will start raising the main rate around the time it ends reinvestment of maturing assets on the balance sheet or soon after, he said. The Fed is currently buying $45 billion in bonds each month to hold down long-term interest rates.

-- It’s unclear whether the discussion “will be only a step forward in the brainstorming process or whether they’ll come to a conclusion” on changes to the strategy, said Thomas Costerg, a New York-based economist at Standard Chartered Plc. Fed Chair Janet Yellen may want to wait for board nominees Stanley Fischer, Lael Brainard and Jerome Powell to win confirmation in the U.S. Senate, he said. The Senate is set to vote on Fischer’s nomination today.

-- Main rate path: FOMC policy makers may signal their preferences for changes in the way they communicate the path for the main interest rate, Thomas Simons, a government-debt economist in New York at the primary dealer Jefferies Group LLC, said in an interview.

Inflation Outlook

-- The current guidance is “not something that they see as 100 percent optimal,” Simons said. “It’s very likely it’s going to evolve.”

-- In March, the Fed dropped a pledge to keep the benchmark federal funds rate low at least as long as unemployment was above 6.5 percent and the outlook for inflation didn’t exceed 2.5 percent. The Fed acted after unemployment dropped to 6.7 percent, even as other labor-market gauges showed continued weakness. The FOMC instead said it will look to a “wide range” of information to determine when to begin raising the fed funds rate. The Fed has held the rate close to zero since December 2008.

-- Also in March, officials released projections showing the rate rising faster than they previously estimated, pushing up bond yields. The Fed shows the projections as dots on a chart, with each dot representing an unidentified official.

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