Fed’s Balance Sheet Dominates What to Watch For in FOMC Minutes

Traders and investors are eager for more detail on the Federal Reserve’s plans to wrap up its balance sheet expansion and a related short-term lending program when minutes of the Jan. 28-29 policy meeting are released Wednesday in Washington.

How and when the Fed will taper Treasury bill purchases is the top question for Stephen Stanley, chief economist at Amherst Pierpont Securities.

“They don’t want to lock themselves into a precise trajectory yet, but maybe we’ll get a bit on the end game and how they see this playing out over a longer period,” he said.

Beyond the balance sheet, Fed watchers have low expectations the minutes will yield a meaningful discussion about China’s coronavirus outbreak and its potential to disrupt U.S. economic growth. Concerns about such fallout have intensified since the meeting, but policy makers have continued to say monetary policy is in “a good place.”

“They’ve set a really high bar” for adjusting interest rates, said Lee Ferridge, head of macro strategy for North America at State Street Corp. “I don’t think that’s going to change in these minutes.”

Officials left the target range for the federal funds rate unchanged at 1.5% to 1.75% at their January gathering and Chairman Jerome Powell said rates would likely remain on hold until their outlook for economic growth saw a “material reassessment.” Most officials forecast U.S. growth this year of around2%.

Read more: Fed Holds Main Rate as Powell Stresses Need to Hit 2% Inflation

The balance sheet questions stem from the Fed’s reaction to a suddenspike in overnight interest rates in September that briefly knocked the Fed’s benchmark rate outside its target range.

The Fed responded immediately with a short-term lending program, pumping money into the market for repurchase agreements. It also began purchasing $60 billion a month in Treasury bills, a move that has boosted bank reserves. This has gradually made the Fed’s own direct repo lending unnecessary as excess reserves are frequently lent into the repo market.

“Maybe we’ll be able to put together when those repos will flow all the way down,” Tom Simons, a senior economist at Jefferies, said of the minutes release.

On Feb. 13 the New York Fedannounced it will shrink repo operations more than analysts expected. Powell has said the repo operations would end “gradually,” a characterization heoffered at his last post-meeting press conference.

Read more: Fed to Withdraw More Liquidity Than Expected Amid Funding Calm

The details are important as the Fed’s intervention affects other borrowers and lenders in the multi-trillion-dollar short-term funding markets, from banks and broker-dealers to money market mutual funds and corporate treasurers.

State Street’s Ferridge said hints about the pace of tapering T-bill purchases could be important.

“The expectation in the market is that this will be very shallow,” he said, with buying not completely ending for many more months. “If there were anything in the minutes that hinted at something much sharper than that, that has the potential to upset the market.”

Economists will also scour the minutes for how committee members viewed the outlook for unemployment and inflation. Inflation continues to surprise to the low side, with the personal consumption expenditures price index rising just 1.6% in 2019 despite the jobless rate ending the year at a 50-year low of 3.5%.

The minutes could provide more explanation for a tweak to the FOMC’s post-meeting statement. In January the committeeforesaw inflation eventually “returning to” their 2% target. In December policy makers had said theyexpected inflation “near” the target.

Powell said the change was meant to avoid any suggestion that policy makers were comfortable with inflation continuing to run below 2%. Some economists, however,interpreted the change as signaling a shift to a more dovish posture, aimed at ensuring inflation rose at least to the Fed’s objective after several years of running mostly below.

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