MNI ANALYSIS: Fed Minutes to Shed Light on 'Accommodative' Cut

By Jean Yung

     WASHINGTON (MNI) - Minutes of the September Federal Open Market Committee

meeting to be released Wednesday might offer insight into policy once rates

reach a neutral level officials estimate to be around 3%.

     The FOMC last month removed language from its statement describing monetary

policy as "accommodative" even though, at 2% to 2.25%, the fed funds rate target

remains about a percentage point from the consensus view of neutral.

     However, individual Fed projections showed increased confidence in a

near-term outlook for a gradual march toward neutral, with another hike this

year and three in 2019.

     Beyond that, the committee has a range of opinions, including a few

projecting a slight easing in 2021. The average rate projection in 2021 is about

5 basis points below that of 2020, although inflation is seen remaining slightly

above 2% and joblessness still a point below full employment.

     --Data Dependence

     Chair Jay Powell described the deletion of "accommodative" from forward

guidance as both moving away from reliance on a theoretical neutral rate and as

indicative of a renewed dependency on data.

     "We don't want to suggest either that we have this precise understanding of

where accommodative stops or suggest that's a really important point in our

thinking," he told his press conference. Instead, the FOMC will be "carefully

monitoring incoming data."

     New York Fed chief John Williams later explained: "at some point in the

future, it will no longer be clear whether interest rates need to go up or down,

and explicit forward guidance about the future path of policy will no longer be

appropriate."

     The minutes might reveal more on policymakers' view of the risks of slowing

growth in jobs or GDP, an unexpected spike in wages or inflation or a sharp

deterioration in financial conditions, any of which could signal the end of the

tightening cycle.

     --2020 Pause?

     Another point of interest is the discussion between those who see further

tightening in 2020 and those who would hit pause on hikes until new developments

in the data.

     A number of officials have recently said taking rates steadily higher into

modestly restrictive territory makes sense given fiscal stimulus and supportive

financial conditions. Fed Governor Lael Brainard pointed out last month that

estimates of the longer-run equilibrium rate are not necessarily relevant to

setting policy in the near term, especially when short-run neutral is expected

to rise further.

     Other officials have only called for a return to neutral. That may suggest

support for maintaining rates at around 3% if inflationary pressures remain

contained.

     Markets so far are betting on the latter scenario, but may reevaluate

should the minutes suggest strong opinions otherwise.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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