Fed Minutes Could Show How Inflation Could Sway Rate Rises

By David Harrison Features Dow Jones Newswires

The Federal Reserve raised interest rates last month by a quarter-percentage point and laid out plans to shrink its portfolio of bonds and other assets. But after its June 13-14 policy meeting, the Fed's statement, new economic projections and Chairwoman Janet Yellen's press conference left many questions about officials' thinking and future course of action. Here's what to watch for in the minutes of the meeting to be released July 5 at 2 p.m. EDT.

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An Old Question: Inflation

Both the statement and Ms. Yellen's press conference suggested little worry about inflation's dip back below the Fed's 2% target in recent months. In the weeks since the meeting, however, several officials have expressed reservations about raising rates further absent new signs of firming inflation. The minutes could provide more detail on the internal debate. Look for signs of a split among officials over how to react to disappointing inflation numbers.

A New Concern: Financial Conditions

Minutes of the March meeting hinted at questions about loose financial conditions, with some officials noting that equity prices had risen "quite high relative to standard valuation measures." Those questions have resurfaced in recent weeks in Fed officials' public remarks. Although the Fed's June statement and Ms. Yellen's press conference didn't suggest any concern about loose conditions it is possible officials addressed the matter at greater length behind closed doors. If that is the case, expect to get further hints of their discussion in the minutes.

Balance Sheet Timing

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The Fed laid out at the meeting its plans for how it will shrink the portfolio, but stopped short of telling us when that process would start. All Ms. Yellen would say during her press conference was that the roll-off could begin "relatively soon." Does that mean we can expect it to begin following the July meeting? The September meeting? Later? The minutes could give us a clue.

A New Inflation Target?

Ms. Yellen caught a lot of observers by surprise in her press conference when she opened the door to re-examining the Fed's 2% inflation target, in place formally since 2012. Economists have been debating inflation targeting for some time, but her statement that the Fed "will be reconsidering" the 2% goal "at some future time" instantly made that debate more relevant. Did officials discuss changing the target during their meeting? We'll find out in the minutes.

How Tight Is The Labor Market, Really?

As the unemployment rate has fallen -- to 4.3% in May -- so has the Fed's estimate of the long-term stable unemployment rate. In June, officials lowered their estimate of so-called full employment to 4.6%, down from 4.7%. But, as Ms. Yellen acknowledged, the correct estimate of full employment is "hard to pin down." Any internal debate on the level of full employment would be hugely relevant for interest rates. If full employment is lower than we thought, that means the labor market has more room to strengthen, which would be a case for delaying further rate increases.

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

July 05, 2017 05:44 ET (09:44 GMT)