The Federal Reserve’s latest meeting minutes aren’t expected to make much of a splash today, but investors should still keep an eye out for a few different themes.
The minutes are due out at 2 p.m. today, and Fed watchers may face a greater challenge than usual in deciphering their significance: A lot has changed in the economy since the April 28-29 meeting. The ensuing weeks have brought a surprisingly weak jobs report and a stronger-than-expected consumer inflation report, for example.
And unlike last month’s meeting, there wasn’t an attention-grabbing selloff in Treasuries to command officials’ attention. The steep climb in yields abated at the end of March, even as economic data showed and stronger price pressures in April. The 10-year yield has dropped to 1.64% from 1.74% on March 31.
Yet the document may still provide some clues about the central bank’s views. And officials have provided more perspective on policy since the latest meeting as well. Notably, Fed Vice Chair Richard Clarida spoke at a conference on Monday and discussed some recent economic data points as well.
Here’s what strategists expect out of the meeting today, and what Clarida said about the topics:
“Attuned and Attentive” to “Transitory” Inflation?
One popular line among Fed officials, including Fed Chair Jerome Powell, has been the assurance that this spring is expected to bring a “transitory” rise in inflation, mostly related to the reopening of the U.S. economy after the pandemic brought a sharp deceleration in activity last year.
Mizuho economists Steven Ricchiuto and Alex Pelle wrote in a May 18 note that they expect “several mentions of ‘transitory’ price pressures” in the minutes. They also highlighted that many of the steepest increases in consumer prices in April were in sectors where demand had been hit most by the pandemic, such as hotels and airfares. “So far [that] validates the Fed’s thinking,” they added.
Yet at Monday’s conference, Clarida seemed to be repeating a different type of assurance about inflation: That the central bank would be “attuned and attentive” to any data showing higher price pressures.
“In the CPI report, [reopening] did clearly put upward pressure on prices. Now our baseline view is that most of this is likely to be transitory, but we have to be attuned and attentive to the incoming data,” he said. “[The] key element of our mandate is price stability and an important component of price stability is well-anchored inflation expectations. If we were to see upward pressure on prices or inflation that threatened to put inflation expectations higher, I have no doubt we would use our tools to address that situation.”
Taper Timeline
Investors will also be looking to see if the central bank provides any additional guidance on when it might start paring back its $120 billion in monthly bond purchases. Powell has said the Fed wants to make “substantial further progress” toward its goals of full employment and a long-term average of 2% inflation before it wants to pare down its purchases, but officials haven’t provided much additional guidance.
Most on Wall Street expect the Fed to discuss longer-term plans to reduce, or taper, its purchases late this summer or during the fall. NatWest Markets said in a Monday note that it expects the Fed to start talking about tapering its purchases in September and actually start to reduce the pace of bond-buying next year.
So any more detailed discussion in the latest meeting minutes could come as a surprise to investors and potentially matter for markets.
Labor-Market Outlook
One key factor that will determine the outlook for the Fed’s bond buying (and other accommodation) is the recovery in the labor market. And that remains up in the air, after the disappointing April jobs report.
Still, there is a chance investors could find more context on one of their questions in the minutes: How much improvement will be enough for the Fed to start withdrawing accommodation? In other words, what does “substantial further progress” mean?
Before the disappointing news on April’s labor market, most of Wall Street expected a strong month for jobs creation, another step toward the “string” of strong months of recovery that Powell had said was needed before the U.S. achieved “substantial further progress” toward the Fed’s goals. That may have prompted officials to discuss just how far along the recovery would need to go before the central bank could start stepping back.
Clarida discussed the April employment report on Monday as well.
“What the April employment report said to me is that the way we bring supply and demand into balance in the labor market, especially in the service sector, may take some time and may produce some upward pressure on prices as workers return to employment, so we have to be attuned and attentive to that data flow,” he said. “Per that April employment report, we have not made substantial further progress, but as the data comes in we as a committee will have to evaluate that, and ultimately make a judgment.”
Ultimately, the importance of future labor-market data hints at the broader takeaway from the Fed’s meeting minutes: Coming months’ economic data may be the final arbiter of what the Fed does, and its plans to remove accommodation from markets and the economy. And the economic data has been so volatile during the reopening that the picture could change significantly by the time the Fed meets again in June.
That means investors will have to hold tight for a while longer to get a sense of when the central bank plans to start stepping back.
“We’re reluctant to call this an equilibrium of any sort – rather it’s much more likely to prove a temporary holding pattern as macro expectations are further refined,” wrote Ian Lyngen, strategist with BMO. “Clearly, we have more questions than answers.”