MNI 5 THINGS: FOMC Minutes Should Clarify Statement Changes

--5-Things To Look For In Thursday's FOMC Minutes

By Sara Haire

     WASHINGTON (MNI) - The large number of changes in the June FOMC statement

left market participants looking for some clarification. Statements from Fed

officials since that meeting have not been much help, with varying views on a

wide array of issues. The minutes from the June meeting, which are scheduled to

be released later Thursday, may give more insight into where participants stand.

     Here are 5 things to look for in the upcoming minutes:

     - When the Federal Open Market Committee met in June, tariffs and

retaliatory tariffs had not been in full effect, but the potential change in the

outlook was likely discussed and could be reflected in the minutes. Since the

June meeting, there have many changes in the US trade policy, which the FOMC may

or may not have foreseen. However, recent comments by Fed Chair Jay Powell and

Governor Randal Quarles suggest that trade policy is not in their purview, and

Quarles added that the effects of tariffs so far have been relatively small.

Despite this reassurance, Atlanta Fed Bank President Raphael Bostic noted

business contacts have shifted away from earlier optimism for the outlook to

concern over trade policy.

     - There may have been some discussion of the potential positive impact of

the fiscal stimulus (as seen by an uptick in the forecast for 2018 GDP growth),

but also some concern that this boost will be temporary and will subside in 2019

and 2020. The June statement updated the Fed's view of the economy to growing at

a "solid rate" from a "moderate rate." While fiscal stimulus is likely to affect

the outlook for the near-term, policymakers have voiced their concern over the

effects in the longer-run and how this may shape their outlook. On Thursday, St.

Louis Federal Reserve Bank President James Bullard reiterated that he does not

want the Fed to raise rates permanently while this growth is set to be

temporary.

     - The removal of forward guidance language was widely anticipated in the

lead up to the June meeting, however the extent to which it was removed still

left some surprise. Chairman Powell downplayed the removal of language that said

that the funds rate target will remain below the long run rate for some time,

noting it was not meant to convey a change in policy direction, but rather that

the economy is able to withstand continued gradual rate increases. The minutes

could also show some debate from participants on keeping the "stance of monetary

policy remains accommodative" language even as the SEP showed an additional rate

hike this year.

     - The rate outlook in the SEP showed a 3.1% rate at the end of 2019, past

the longer-run target of 2.9% that is considered to be "neutral." A few

policymakers have voiced their concern about raising rates past neutral while

others, like Atlanta Fed Raphael Bostic, have said that they don't necessarily

want to stop raising rates before hitting neutral. The question then

remains--where is neutral and how far past neutral is the Fed willing to go.

Given that the statement said that monetary policy remains accommodative, the

issue of just how much accommodation is left to give before hitting neutral and

whether some participants expect a slowdown or a speed up in rate increases will

probably be a talking point within the minutes from the June meeting.

     - The flattening of the yield curve continues to be at the forefront

surrounding discussions over whether the Federal Reserve should continue to

raise rates which could cause the yield curve to invert. June meeting minutes

may address the yield curve inversion in more depth considering the FOMC's

decision to raise rates again and a projection for another two rate hikes this

year. Some officials, such as NY Fed President John Williams and St. Louis Fed

President James Bullard have contended that an inverted curve has often preceded

recessions and should be considered careful, while others such as Powell and

Governor Lael Brainard have suggested it is only one of many factors to watch.

Also, the historically low term premia has also been noted as a possible reason

for why an inverted yield curve may not be as alarming.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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