Fed Minutes to Shed Light on Central Bank Strategy Review

Chairman Jerome Powell, shown during a March 3 news conference, and other Fed officials are wrapping up a review of the central bank’s policy framework.

Photo: Jacquelyn Martin/Associated Press

Minutes from the Federal Reserve’s latest policy meeting are likely to shed more light on how central bank officials will wrap up their yearlong strategy review by effectively abandoning their past practice of pre-emptively lifting interest rates to head off higher inflation.

Fed officials didn’t announce new policy steps at the conclusion of the July 28-29 meeting and reiterated their pledge to maintain aggressive measures to support the economy.

Here’s a look at what to watch in the minutes, which will be released Wednesday at 2 p.m. Eastern Time:

The Framework Review

Fed Chairman Jerome Powell and other central bank leaders have indicated they are preparing to adopt a policy of seeking to make up for periods of low inflation by allowing subsequent periods of somewhat higher inflation. The practical effect is it will be a long time before they raise interest rates.

This will be the most significant change resulting from their yearlong review of the Fed’s policy framework, and it is likely to be formally enshrined in January in the central bank’s statement on longer-run goals and monetary-policy strategy. The document was first adopted in January 2012 and is traditionally approved at the start of every year.

Officials began the review animated by concerns that the inflation framework that has guided their rate strategy for the past three decades needs to be updated for a world in which the biggest challenge isn’t the runaway inflation of the 1970s but rather the difficulty of setting policy when interest rates are so low they can’t be cut.

The minutes will show how much progress officials made when they resumed deliberations at the July meeting after tabling them months earlier because of the pandemic-induced economic shock. Mr. Powell indicated after the meeting that the review could conclude soon. By revealing details of the latest debate, the minutes would preview the most likely outcomes.

Forward Guidance

Changing the Fed’s strategy is one thing—in this case, by committing to stay off the brake pedal for longer than in past cycles. Deploying the tools to spur a faster return of inflation to the central bank’s 2% goal—a way to step on the gas—is another.

The minutes could shed light on any forthcoming changes regarding the Fed’s guidance about interest rates and asset purchases, which some analysts believe would help reinforce any change in strategy. To do that, the Fed could specify what inflation and employment conditions would justify higher interest rates or a slowdown in asset purchases.

Asset Purchases

At their June 9-10 meeting, Fed officials thought the central bank would need to “provide more clarity regarding purchases of Treasury securities and [mortgage bonds] as more information about the trajectory of the economy becomes available,” according to minutes of the meeting.

The Fed and Coronavirus

  • Fed Deliberates How and When to Roll Out More Economic Support (July 22)
  • The Federal Reserve Is Changing What It Means to Be a Central Bank (April 27)
  • Fed Expands Corporate-Debt Backstops, Unveils New Programs to Aid States, Cities and Small Businesses (April 9)

Officials haven’t shown any urgency to change the maturity composition of their Treasury purchases. For now, they are buying $80 billion in Treasurys every month and $40 billion in mortgage bonds, net of redemptions. One way to provide more support to the economy could be to shift those purchases toward longer-dated bonds, as the Fed did after the 2008 global financial crisis. But officials may feel little urgency to do this now, with long-term interest rates much lower.

Officials also have yet to say whether, how and when they would link their asset purchases to specific inflation and employment goals, using the same type of forward guidance for interest rates.

Sequencing Steps

Apart from the policy choices themselves, there is a question about how to sequence the next steps. The conclusion of the review “will inform everything we do going forward,” Mr. Powell said at a July 29 news conference. But at the same time, he said the central bank preferred to maintain as much flexibility as it could about its next moves. “I can’t give you a specific trigger,” he said. “It really just is when we think it would help.”

One school of thought says the Fed should strengthen its guidance around interest-rate and asset-purchase plans when it concludes the strategy review at its next meeting, Sept. 15-16. Minutes of last month’s meeting could show how much support existed for such an approach, or whether officials didn’t see a need to announce the review conclusions and their near-term policy changes at the same time.

At their next meeting, officials will deliver updated economic and interest-rate projections through 2023, which will provide a softer form of so-called forward guidance. Their June projections showed most officials didn’t expect to raise interest rates at least through 2022, the last year of the projection horizon.

Economists have long used letters of the alphabet like V and U to describe economic recoveries. But the coronavirus downturn is so different from past recessions that economists are coming up with new shapes to describe the potential recovery. WSJ explains. Illustration: Jacob Reynolds

Economic Outlook

Fed officials have strongly indicated a preference for additional government spending to support households and businesses amid the coronavirus pandemic, and the minutes are likely to highlight concerns about a decline in economic activity should recent fiscal support fade.

Likewise, the minutes are likely to show the degree to which Fed officials see the public-health response as the most important component of any economic rebound. To underscore this point, officials added the following sentence to their postmeeting statement last month: “The path of the economy will depend significantly on the course of the virus.”

Officials have indicated they see their specific monetary-policy choices as less important to the near-term economic outlook than steps other policy makers can take to boost confidence in public health and to aid businesses and households.

Write to Nick Timiraos at [email protected]

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