Subject: (BN ) Fed Minutes Hold More for the Markets to Ponder: John
From: JOHN BERRY, BLOOMBERG/ WASHINGTO (JBERRY5@bloomberg.net)
Date: Wed Jan 05 2005 - 05:24:24 EST
Another major step towards transparency.
Fed Minutes Hold More for the Markets to Ponder: John M. Berry
2005-01-05 00:06 (New York)
(Commentary. John M. Berry is a Bloomberg News columnist. The
opinions expressed are his own.)
By John M. Berry
Jan. 5 (Bloomberg) -- With the first early release of the
minutes of a Federal Open Market Committee meeting, financial
markets gained important new information about the views of
Federal Reserve officials that otherwise would have remained
obscure for another month.
And the market reacted accordingly. They drove up yields on
Treasury securities in response to a heightened sense of concern
about inflation clearly shown in the minutes of the most recent
FOMC meeting on Dec. 14, at which the target for the overnight
federal funds rate was raised by a quarter-point to 2.25 percent.
Stock prices fell as well.
``Even with this action, the current level of the real funds
rate target remained below the level it most likely would need to
reach to keep inflation stable and output at its potential,'' the
minutes said. ``With the economic expansion more firmly
entrenched, cost and price pressures were likely to become a
clearer intermediate-term risk to sustained good economic
performance absent further reduction of accommodation.''
In short, so long as the expansion continues apace,
according to the officials' interpretation of incoming economic
data, rates will continue to rise.
Actually, there was much more in the minutes that market
participants should ponder than just the consensus explanation of
the committee's action last month. And it may well be that
markets somewhat over-reacted yesterday.
Worries About Inflation
For example, economist Ted Wieseman of Morgan Stanley told
his company's clients the minutes ``showed clear signs of
increased worries at the Fed about the inflation outlook, setting
the stage for a change in the official risk assessment for
inflation as early as the February 1-2 FOMC meeting.''
Wieseman focused on a section of the minutes that said a
``number'' of the 19 FOMC participants clearly are more concerned
about rising inflationary pressures than in the past. That
``number'' cited as ``upside inflation risks'' the still high
level of oil prices, the falling dollar, slower growth of
productivity and the possibility that the economy could be
operating close to its potential.
In contrast, the minutes said, ``participants generally
expected that inflation would remain low in the foreseeable
future.'' Moreover, that larger group, clearly a substantial
majority, went on to rebut each of the concerns of the smaller
group, pointing to ``factors that likely would continue to
provide a counterweight to any upside risks.''
Core Inflation Stable
Those factors included evidence that a decline in the dollar
has a smaller impact on U.S. prices that used to be the case,
that long-term inflation expectations ``have been quite stable of
late,'' that moderate wage and compensation growth suggests there
is still slack in the economy and that ``there are no clear signs
that underlying productivity growth had slowed appreciably of
late,'' the minutes said.
And incidentally, the Fed staff forecast at the meeting
included predictions that total consumer price inflation would
decline next year as a result of falling energy prices. ``By
contrast, core inflation was seen in the staff forecast as
remaining stable,'' the minutes said.
Any sense of increased hawkishness among Fed officials ought
to be tempered by the fact that only a few words were changed in
the statement issued after the FOMC meeting. Barring some major
surprise on the inflation front, there is little likelihood that
the committee will conclude at the February meeting that the
balance of risks has shifted toward greater inflation.
Data Flow
What this back and forth indicates is that growth at or a
bit above the economy's potential -- most Fed officials put that
figure at around 3.5 percent -- won't cause the FOMC to
accelerate the pace at which it has been raising the fed funds
target. That is, a quarter-point per meeting.
Nevertheless, the outcome of each meeting will depend, as it
did last month, on the flow of new economic data. For instance,
the relatively weak employment report for November had little
impact on last month's decision when balanced against other data,
including the stronger labor report for October.
That sort of insight into how Fed officials reacted to the
figures available to them at the December meeting is why
releasing the minutes three weeks after each FOMC meeting,
instead of a day or two after the following meeting, will be so
valuable to financial markets. And better-informed markets, most
Fed officials believe, will be a good thing all around.
Who Participated
The latest version of the minutes, with all their richness
of detail and now early availability, are a far cry from the
past.
Prior to March 1993, a much less detailed Record of Policy
Actions was made available, and Fed officials routinely pointed
out that in that form they were not minutes.
The Policy Record, as everyone called it, was released
following the subsequent FOMC meeting from 1976 through 1992.
>From 1967 to 1976 they were released with a 90-day delay, and
prior to 1967 the records of FOMC actions were published once a
year in the Fed's annual report.
Since last January, when the FOMC discussed early release of
the minutes, the Fed staff had experimented to see logistically
how quickly they could be made available, given that participants
are scattered around the country or outside it during the inter-
meeting periods. The committee decision was to release them with
the three-week lag, a choice some former Fed officials have
criticized as too long, pointing to the two-week lag at the Bank
of England.
Aside from their early release, there was another small
improvement in the December minutes.
The 19 FOMC participants include the seven members of the
Federal Reserve Board and the presidents of the 12 regional
Federal Reserve banks. On the other hand, there are only 12
members of the FOMC -- those who vote, and they are the board
members, the president of the New York Federal Reserve Bank and,
on annual rotating basis, four other presidents.
For the first time, the minutes included information
formally noting this distinction between participants and
members.
--Editors: Ahearn, Siler, Todd.
Story illustration: To compare the Fed's target rate with the
monthly unemployment rate:
{FDTR <Index> USURTOT <Index> HS 2 <GO>}.
To see a series of fed funds futures contracts:
{FFA <Cmdty> CT <GO>}.
For stories about Federal Reserve actions: {FEDU <GO>}.
For multimedia recordings of Fed officials' speeches:
{NCMT 93 FED <GO>}.
To contact the writer of this column:
John M. Berry in Washington at (1)(202) 624-1962 or
jberry5@bloomberg.net.
To contact the editor responsible for this column:
Bill Ahearn at (1)(212) 893-4197 or bahearn@bloomberg.net.
[TAGINFO]
NI TOP
NI BERRY
NI FED
NI GOV
NI COLUMNS
NI COLUMNISTS
NI FEA
NI COS
NI US
#<698734.251583>#
-0- Jan/05/2005 5:06 GMT
