What to expect from the July Fed minutes

Financial markets will be focused on the minutes of the Fed's July meeting for clues on key issues. The debate at the Fed boils down to two possibilities: one side clearly sees a September taper as a "sure bet" but the other side may want more data before any moves.

By Greg Robb
Aug. 20, 2013, 1:10 p.m. EDT
Market Watch

WASHINGTON (MarketWatch) — How close is the Federal Reserve to tapering? Was the central bank having any second thoughts about making a first move at its meeting in September or were they just nailing down the details?

Financial markets will be poring over the minutes of the Fed’s July meeting for clues on these key issues, when they are released at 2 p.m. on Wednesday.

Avery Shenfeld, chief economist at CIBC World Markets, thinks that Fed watchers don’t need microscopes this month.

Recent speeches by Chicago Fed President Charles Evans, St. Louis Fed president James Bullard, and Atlanta Fed President Dennis Lockhart have shed a lot of light on the internal debate at the central bank, he said.

“We know a lot about what they think individually. I can’t see how the minutes are going to add clarity,” he said.

The debate at the Fed can be boiled down to two faction, Shenfeld said.

One camp clearly sees a September taper as a “sure bet,” while the other might be willing to move at that meeting but want to see more data.

Still, many other Fed watchers say there insights to be gleaned from the minutes.

Some think the Fed will talk about “logistical issues” if they intend to taper in September.

These include discussion of the size of the initial reduction in asset purchases and whether they concentrate on cutbacks in Treasurys or mortgage-related assets.

“If policymakers are preparing to act on tapering as soon as September, we would expect the minutes to indicate that policymakers addressed these issues in detail in late July,” said Ward McCarthy, chief financial economist at Jefferies, in a note to clients.

“We expect that the minutes will discuss tapering logistics in only a broad and vague fashion. The Fed is headed toward tapering, but there are no signs that it is in a rush to do so,” McCarthy said.

The policy statement released after the Fed’s July 30-31 meeting was relatively dovish.

The central bank stressed it was worried about low inflation and said it was concerned about the risks to the economy from higher mortgage rates.

Kris Dawsey, economist at Goldman Sachs, said it would be interesting to see if the minutes back up this dovish tone.

In general, the minutes tend to tilt hawkish, as it is gives equal weight to the views of some of the more hawkish Fed regional bank presidents who are not voting members this year.

Shenfeld said that one area of interest would be whether the central bank discussed changes to its forward guidance that it will not raise short-term rates until the unemployment rate falls to 6.5% as long as inflation stays tame.

Bernanke suggested in testimony to Congress in July that this 6.5% threshold could be replaced by a lower unemployment rate.

This strengthened forward guidance could be used as a way to dispel concerns in the bond market that a rate hike would come sooner as a result of the tapering.

Michael Hanson, U.S. economist at Bank of America Merrill Lynch, said he didn’t expect the minutes to resolve the tapering issue.

“The nature of the taper is likely to be a ‘game-day’ decision, and there are many possible intermediate scenarios between no taper and current market expectations,” Hanson said in a note to clients.

“The market is pretty much set on a September taper, in the $20-$25 billion range, with the only question remaining about how much of the reduction will be Treasurys,” Hanson said.

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