Fed Minutes Eyed for Details on Rate Liftoff, Shrinking Assets
Fed is on track to end its asset-buying program in March, opening the way for raising rates.
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Investors gauging the likely timing of the Federal Reserve’s first interest-rate hike and its kick-off for shrinking a balance sheet now at a record $8.8 trillion will get fresh clues on Wednesday, with minutes of policy makers’ meeting last month.
The U.S. central bank is on track to end its asset-buying program in March -- opening the way for raising rates and running off some of its bond holdings -- after it on Dec. 15 doubled the pace of tapering purchases. Minutes from the Federal Open Market Committee meeting will be released at 2 p.m. in Washington on Wednesday.
Forecasts from Fed officials in the “dot plot” published alongside the policy statement showed the expectation for three quarter-percentage-point increases in the key federal funds rate target in 2022.
Increasing conviction among investors that the Fed indeed will raise rates at least three times this year has driven up Treasury yields, with five-year rates hitting a pandemic-era high Tuesday. Markets are pricing in 63% odds of a rate hike in March.
The minutes could give “additional detail on what conditions the FOMC would want to see before it raised rates,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “The biggest items would be any clues on the thought process around liftoff -- whether the committee is thinking there will be time between the end of asset purchases and liftoff.”
Fed Chair Jerome Powell at his press conference after last month’s meeting said that policy makers eventually “expect a gradual pace of policy firming.” They don’t anticipate raising rates before ending the taper process, but could hike before reaching full employment, he added.
What Bloomberg Economics Says...
“Given the shifts at the last meeting, we’ll be watching for whether the reason for doubling the taper pace is primarily to create an option for early rates liftoff if inflation surprises further on the upside, or if members believe the current pace of inflation warrants an actual rate hike as soon as March. On that point, it would be particularly useful to see if we get any clarification on what ‘maximum employment’ means. Or, a sense of how many (i.e. is it ‘almost all’, ‘most’ or just ‘many’ or ‘some’) who see that condition close to being met. The greater the consensus, the easier it’ll be to flip the rate lever.”
--Andrew Husby (economist)
The abrupt change in the taper pace -- coming just a month after the reduction began -- reflects “inflation developments and the further improvement in the labor market,” the FOMC said in its statement. The Fed reiterated that it “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”
The discussion of the new omicron variant also could be important, potentially giving more detail on developments the committee has described as a risk to the economic outlook.
“It will be important how they were thinking about omicron at the last meeting,” said Diane Swonk, chief economist at Grant Thornton LLP. The rise of variants may be “more inflationary than disinflationary because of the disruptions they create for supply,” she said, adding that “omicron may suppress demand more than anticipated as businesses are forced to shutter temporarily due to illness.”
While the Fed’s pivot in December was clearly hawkish, with greater concern about inflation, the minutes could show that some committee members worried about raising rates too quickly -- undermining gains in employment.
Internal Debate
“It looks like the Fed is singing from the same hymn sheet, but the minutes may highlight a bit more the internal debate between those more worried about inflation and those still worried about breaking the recovery,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management.
Costerg said the employment discussion will be important ahead of Friday’s December jobs report. While policy makers have said they expect to reach full employment before raising rates, they have been vague about what metrics they would use to evaluate that. The U.S. likely added 424,000 jobs and the unemployment rate probably fell to 4.1% in December, according the median estimates in a Bloomberg survey of economists.
The minutes could hint at a quicker start to shrinking the balance sheet than after the prior tapering, Andrew Hollenhorst, chief U.S. economist at Citigroup Inc., said in a report.
“Balance-sheet reduction could be started concurrently with the first rate hike,” he wrote. “If the first hike occurred in March, it is possible that the committee would simply continue to taper purchases resulting in a reduction in the size of the balance sheet concurrent with the first rate hike.”
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