Fed Minutes to Offer Clues on Debate Over Path of Rate Increases

By Harriet TorryFeaturesDow Jones Newswires

Federal Reserve officials left their benchmark short-term interest rate unchanged within a range between 0.75% and 1% at their meeting May 2-3, and minutes of that gathering could indicate whether they are preparing to lift it by a quarter percentage point at their next meeting June 13-14. The minutes, to be released 2 p.m. EDT Wednesday with the usual three-week lag, are likely to provide more detail on the internal debate over the path of rates. They also could shed light on evolving plans to shrink the Fed's holdings of bonds and other assets. Here are five things to watch for.

How Likely Is a June Rate Increase?

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The Fed last raised short-term rates in March, and it penciled in two additional quarter-percentage-point increases this year. June offers a good opportunity for another move: The meeting is followed by a press conference by Chairwoman Janet Yellen, and raising rates a second time in the first half of 2017 would give officials more time to evaluate how the economy evolves before considering a third increase in the second half of the year. Expectations for a June rate increase are high. A recent Wall Street Journal survey found 88% of economists expected such a move. Traders in futures markets place an 83% likelihood of a move in June, according to CME Group. The minutes could either confirm or confound that expectation.

Weak Economic Growth

One argument for holding off on a June rate increase could be the economy's mixed performance since March. Inflation wobbled recently: The Fed's preferred inflation gauge, the price index for personal-consumption expenditures, briefly exceeded the Fed's annual 2% target in February but slipped below it again in March, as prices rose 1.8%. Economic growth in the first quarter also disappointed, with gross domestic product expanding at a 0.7% annual rate. However, the Fed said in its May policy statement that the slowing was "likely to be transitory," suggesting the central bank wasn't overly worried about the slump. Also on the plus side, the unemployment rate has fallen further since the Fed last raised rates, to 4.4% in April, its lowest level in a decade. The minutes could provide more detail on officials' assessment of the economy's health.

Slimming the Balance Sheet

A point of interest in the May minutes will be officials' discussion of how and when to start shrinking the Fed's portfolio of bonds and other assets. Minutes of the Fed's March policy meeting indicated officials wanted to begin the process by the end of the year, but questions remained over the pace of reductions and the size of the holdings when they finish. The Fed's balance sheet has grown to $4.5 trillion, or around 23% of U.S. gross domestic product, from less than $1 trillion, or around 6%, before the financial crisis. Reducing its size without roiling markets will be a delicate task. Officials in March were careful to note they wanted to proceed in a "gradual and predictable" way, likely to avoid a rerun of the 2013 "taper tantrum," when the prospect that the Fed would slow its asset purchases set off market volatility, including a spike in Treasury yields and large capital outflows from many emerging-market economies.

Fiscal Policy

Fed officials continue to assess whether the Trump administration's proposed tax cuts, spending plans, regulatory changes or other policies could boost economic growth and drive up inflation. Minutes of the Fed's March meeting showed most officials saw a possibility that the economy could perform better than they expected because of possible new tax and spending policies. Minutes of the May meeting could provide a more recent snapshot of their thinking.

Challenging Assumptions

A couple of Fed officials have cast doubts on the strength of the labor market recently, and that will be a point to watch in the minutes. Although the unemployment rate hit an ultralow 4.4% last month, there hasn't been a breakout in inflation. Economists would usually expect inflation to rise when joblessness gets low as companies compete for scarcer workers by offering higher wages. Over the past few weeks, several Fed officials have said the labor market has returned to full employment, which means essentially every worker looking for a job can find one. But two officials, Fed governor Lael Brainard and Minneapolis Fed President Neel Kashkari, have expressed doubts about that in recent days, arguing there might be further room for improvement in the labor market since the low joblessness hasn't meaningfully boosted prices. Details of this debate could show up in the May minutes, and could indicate some officials might be inclined to keep rates lower for longer to help push up wages.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

May 24, 2017 05:44 ET (09:44 GMT)