The next Fed concern: Inflation and interest rates

Maybe the worry is confusing investors, or maybe the Fed is anxious about it’s plans to change the stimulus package. Whatever it is, reporters picked up on several themes in the latest Fed’s minutes.

Jon Hilsenrath’s story for the Wall Street Journal ran under the headline that the Fed was worried about inflation:

Federal Reserve officials are growing concerned the U.S. inflation rate won’t budge from low levels, the latest sign of angst among central bankers about weakness in the global economy.

The Fed began 2014 hopeful that a strengthening U.S. economy would push very low inflation from 1% toward the 2% level that officials associate with healthy business activity. Three months into a year marked by unusually harsh winter weather, which appears to have damped economic growth, there is little evidence of such movement.

Fed officials expressed worry about the persistence of low inflation at a policy meeting last month, according to minutes of the meeting released by the central bank Wednesday. They discussed at the March 18-19 meeting whether to make a more explicit commitment to keeping short-term interest rates pinned near zero until they saw inflation move up, but chose instead to take a wait-and-see approach.

Low inflation is high on the agenda of global central bankers and finance ministers gathering in Washington this week for semiannual meetings of the International Monetary Fund. Bank of Japan officials are trying to overcome more than a decade of on-again-off-again deflation, and inflation in Europe is running close to zero.

“We think there is also a risk of deflation, negative inflation. And we think that if this were to happen, this would make the adjustment both at the euro level, and even more so for the countries in the periphery, very difficult,” IMF chief economist Olivier Blanchard said of Europe on Tuesday, after the IMF released updated economic projections. “We think that everything should be done to try to avoid it.”

On its face, flat consumer prices sound like a blessing that holds down household costs. But when tepid inflation is associated with small wage gains, excess business capacity and soft global demand, as now, economists see it as a sign of broader economic malaise that restrains investment and hiring. Exceptionally slow wage and profit gains also make it harder for household and business borrowers to pay off debt.

The New York Times story by Binyamin Appelbaum led with the Fed’s decision about when to start raising short-term interest rates:

The meeting, which the Fed described for the first time on Wednesday, underscores the complexity of the decision to replace the Fed’s guidance about when it might begin to raise short-term interest rates — which emphasized a specific unemployment threshold — with a vague description of the central bank’s economic goals.

Fed officials felt that markets understood the old guidance, and they were reluctant to disrupt that understanding, according to the minutes. But they concluded that the scheduled March meeting was an opportune moment to make the change, which was necessary at some point as the unemployment rate, currently standing at 6.7 percent, fell toward the Fed’s threshold level of 6.5 percent.

The account of the two meetings, which the Fed published on Wednesday after a standard three-week delay, said that most officials agreed that the Fed should move to a weaker form of guidance rather than trying to substitute a new threshold based on the unemployment rate or some other specific target.

While both stories are talking about the same issue, what is interesting is the framing. One chose to focus on inflation and the economic model, the other decided to turn a spotlight on how to communicate the new moves. Bloomberg’s story by Jeff Kearns and Craig Torres focused on the market’s reaction to the minutes:

U.S. stocks rallied the most in a month while Treasuries pared declines after the minutes eased concern about the timing of future interest-rate increases. Even after rates rise, officials said last month, they might have to be kept at levels considered below normal for longer because of tighter credit, higher savings and slower growth in potential output.

The minutes reinforce Janet Yellen’s message at her debut press conference as chair last month that the interest-rate forecasts of policy makers — which are displayed as a series of dots on a chart — are less important than the Fed’s post-meeting statement.

“She was pretty blunt about it, saying ‘Pay attention to the statement, don’t look at the dots,’ ” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $400 billion. “They knew this could be a source of confusion with the dots moving up, and they were thinking about how to manage that.”

The Standard & Poor’s 500 Index rose 1.1 percent to 1,872.18 to close at the high of the day. The yield on the 10-year Treasury note climbed one basis point to 2.69 percent.

Treasury yields jumped last month after policy makers predicted that the benchmark rate would increase faster than previously forecast and Yellen said rates might start to rise “around six months” after the Fed ends its bond buying.

Jonathan Spicer and Ann Saphir wrote for Reuters that the minutes didn’t actually clear up anything:

The minutes shed little new light on what might prompt an eventual policy tightening after the Fed ends its bond-buying program, which most policymakers thought would be completely wound down in the second half of 2014.

After its March meeting, the Fed said in a statement that it would wait a “considerable time” following the end of its bond-buying program before finally raising interest rates.

Fed Chair Janet Yellen played down the “upward shift” in Fed officials’ rate forecasts in her post-meeting press conference, saying that the “dots” are not the Fed’s primary way to communicate policy.

But what drew the most attention from financial markets was Yellen’s definition of “considerable time” as “around six months,” depending on the economy.

What’s interesting about the coverage is that many of the major news organizations didn’t find the same things in the minutes. Often agencies give guidance, shaping the coverage for the day, but in this case many of the stories were different in their focus. While the policy minutes contain much information and no one was inaccurate in the reporting, the different takes do make a point about the new regime at the Fed.