5 THINGS TO WATCH IN THE FED´´S DECEMBER MINUTES / THE WALL STREET JOURNAL

5 Things to Watch in the Fed’s December Minutes

By Pedro Nicolaci da Costa

7 Jan 2015 6:00am ( new)

Reuters       

 

 

The Federal Reserve on Wednesday releases minutes of its Dec. 16-17 meeting, held before a fresh round of market turbulence pushed oil prices below $50 a barrel, global bond yields to fresh lows and the U.S. dollar to new highs.

Investors will be looking for clues into the Fed’s thinking about how market movements might affect its policies. In addition, traders will be on the lookout for officials’ views on inflation and the labor market, and any hints about when the central bank is likely to start raising interest rates from near zero. Here are five things to watch: 

                                 

• 1 Considerable Patience

  Fed officials decided at the meeting to say in their policy statement they would be “patient” in deciding when to lift interest rates. And just to make sure they didn’t freak out the markets, they also said this new phrase was consistent with the language in previous statements saying they would likely keep rates very low for “a considerable time” after they ended their bond-buying program in October. It was a wordy solution to the challenge of giving themselves more flexibility without signaling a policy change. Three policy makers were unhappy enough with the outcome that they dissented. The minutes could shed more light on the internal debate.

• 2 Disinflation Worries

  Fed Chairwoman Janet Yellen indicated during her post-meeting press conference that she sees the drag on U.S. inflation from falling oil prices as a fleeting phenomenon. However, with Wall Street repeatedly revising down its views for the likely average oil price during 2015, there is a chance Fed officials will begin to worry the hit to overall inflation will spill over into so-called core prices, which exclude volatile food and energy prices. Inflation has been running below the Fed’s 2% target for the last 31 months. Inflation expectations will be crucial in this regard, and these have fallen to their lowest since 2009 by some measures. The minutes could show what Fed officials thought about inflation expectations in mid-December.

• 3 Oil Price Plunge

  Were Fed officials still viewing the rapid decline in energy costs primarily as a boon to economic growth or were they beginning to worry that the sheer speed of the selloff could be signal of flagging overseas demand? Policy makers have made clear they see overseas weakness as the biggest obstacle to what otherwise forecast to be a fairly strong year for the U.S. economy. Any ongoing optimism about swooning oil costs would be important, signaling a continued willingness to raise rates.

• 4 Employment on the Rise

  Unemployment has been falling much more quickly than policy makers had anticipated. This leaves them in a bit of a bind as they decide how much unused capacity, or slack, remains in the economy. Fed officials have indicated wage growth is a key factor they are looking for, but it is unclear that they would wait for a considerable pick up in compensation before starting to raise interest rates, which have been near zero since Dec. 2008. The minutes could clarify their thinking on the issue.

• 5 The Dollar

  Fed officials have said a strong U.S. dollar has the potential to hurt exports and put downward pressure on inflation. The dollar rally has only gained momentum since the central bank’s last meeting. It will be interesting to see how much discussion of exchange rates took place during the meeting.