MNI POLICY: 'Patient', Balance Sheet Top Items On FOMC Minutes

By Kevin Kastner

     WASHINGTON (MNI) - Minutes of the January 29-30 FOMC meeting to be released

on Wednesday will be scrutinized for more details of the Fed's change to a more

neutral policy stance.

     The following are the key themes to watch for in Wednesday's report:

     - The statement released on January 30 included special comments on the

policy framework and balance sheet normalization that confirmed the FOMC's

suggestions that an ample supply of reserves is the best option for monetary

policy implementation, but that the target Federal Funds rate remains the the

primary monetary policy tool.

     - At the same time, the FOMC reiterated that it would be ready to adjust

it's balance sheet normalization if conditions require and if additional policy

accommodation was needed beyond the adjustment of the FFR. This added statement

is seen as addressing market concerns that the FOMC's normalization plan

remained on autopilot. The minutes should provide further color on the

discussion that led to the addition to this extraordinary statement, as well as

a clearer indication of when the FOMC may taper its balance sheet normalization.

     - The FOMC said in the January 30 statement that it will "be patient" as it

determines the the future monetary policy path. While the addition of this

wording was widely anticipated based on the FOMC minutes of the previous

meeting, and has been repeated in speeches since the meeting, the discussion

involving this change may reveal any dissenting opinions at that time.

     - Analysts will also be looking at any discussion that the bar for another

rate hike has been raised considerably in light of the "muted" inflation

pressures that the FOMC cited in its statement. The statement noted that

market-based measure of inflation compensation had moved lower and longer-term

inflations expectations were little changed, even as it pointed to a

strengthening labor market and strong household spending growth. 

     - Also, there is an outside possibility of some discussion of a move from

the FFR to the OBFR (overnight bank funding rate) as a primary policy target,

seeing it as more widely traded. Any discussion is likely to be in the NY Fed's

trading desk briefing in the statement, rather than in the participant's

discussions. Still, the presence of any discussion on the topic could represent

a shift in that direction.

     - Finally, any signs of increased downside risks outside of the widely

discussed political and economic risk in the US or abroad and an equity market

impacts could be of interest to analysts and the markets. The FOMC statement

mentioned "global economic and financial developments" as reasons, along with

the "muted" inflation as their reasons for shifting to a more patient stance.

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com

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