(Bloomberg) -- As financial markets and the Trump administration clamor for lower interest rates in the face of a slowing economy, the Federal Reserve is refusing to see any rush.
Analysts will be seeking clues to the limits of that patience on Wednesday, when minutes from the Federal Open Market Committee discussions of March 19-20 are due out. The FOMC kept rates steady at the meeting, forecast no additional hikes this year, and said it would halt the process known as quantitative tightening -- essentially the shrinking of the Fed’s bond portfolio -- in September.
Markets drew the conclusion that a rate cut is likely by January, and President Donald Trump and his advisers quickly endorsed the idea. But FOMC forecasts still suggest a hiking bias, with six participants projecting higher interest rates this year while 11 see no change. And two prominent doves, St. Louis Fed President James Bullard and Neel Kashkari of Minneapolis, both said after the meeting that it’s premature to talk about cutting rates.
“Fed officials over the last week or two have been emphasizing that they are a long way from a cut,’’ said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “That seems like a candidate for something meaningful coming out in the minutes.”
Here are some key points Fed-watchers will be looking for:
Rate-Cut Threshold
Chairman Jerome Powell has said the Fed is no hurry to move, with the economy likely to grow at a solid pace and inflation low. Along with most committee members, he’s been vague on what it would take to end the pause.
“My sense is that the threshold for cutting is very high and would involve something going seriously wrong with the outlook –- for example a risk of recession, and not simply inflation that fails to reach target,’’ said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and former Fed economist. “To me, this is the most important aspect of the minutes.’’
Growth and Inflation
Since its last rate hike in December, the FOMC has trimmed its forecasts for economic growth, seeing smaller contributions from household spending and business investment. While Powell and Fed officials have stressed their positive outlook, the minutes could give some indication of why their views shifted so quickly.
“They haven’t done a great job explaining what is so different between December and March,’’ said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co (NYSE:JPM). in New York. “This could provide an opportunity to do so.”
What Our Economists Say
An important focal point of the minutes will be to determine the extent to which Fed officials expect the sources of recent economic weakness to be transitory. -- Carl Riccadonna, Yelena Shulyatyeva and Tim Mahedy
Attention will likely be paid to any FOMC comments about a flattening yield curve -- especially because the curve inverted after the March meeting, with 3-month Treasury yields rising above 10-year yields. Some economists take that as a serious recession warning.
There’s also been a reassessment of inflation among some committee members. “I don’t feel that we have kind of convincingly achieved our 2 percent mandate in a symmetrical way,’’ Powell told reporters last month. He says he’s not worried about a tight labor market fueling higher wages. The minutes could provide some elaboration of these views.
Balance Sheet
Powell said the balance-sheet shrinkage would end in September, but left lots of questions unresolved.
One detail is when the Fed might start expanding its portfolio again, even if it’s only in order to keep it constant relative to a growing economy, according to Jonathan Wright, a professor at Johns Hopkins University and former Fed economist.
Another is related to the composition of holdings, Wright said. “They want an all-Treasuries program in the long run, but I don’t think that they have been clear on whether the maturity is to be roughly proportional to Treasuries outstanding,” he said. “That would be my working assumption. But it would be significant if they went to a shorter-duration portfolio.’’