The Fed's Muddled Minutes


By Rich Miller Once the Federal Reserve decided that it was going to start releasing the minutes of its monetary policy meetings earlier than it had been doing in the past, few doubted that those records would take on added importance for the financial markets. No longer would investors have to wait six weeks or more to find out what Fed policymakers debated behind closed doors. Now, the minutes are released just three weeks after the central bank meets, in plenty of time to shape investor expectations about what Fed policymakers will do at their next gathering.

But drawing the correct conclusions from the minutes is tricky. It's a document unlike anything else Fed Chairman Alan Greenspan and his central bank colleagues put out. In the interests of helping investors get things right, here's BusinessWeek Online's humble attempt at a how-to guide for reading the Fed records.

A Missive Without a Message. Unlike the brief statement that the Fed issues after each of its monetary meetings, the minutes are not intended to deliver a single, clear message to the markets about central bank policy. In fact, just the opposite is the case. The minutes are meant to portray the nuanced discussions that led to the policymaking statement. In that sense, the minutes can be said to muddle the Fed's message, not make it clearer.

A (Mis)leading Indicator. Yes, the minutes can serve as a leading indicator of where interest rates are headed. If the meeting's talk is about faster inflation, then it's likely that interest rates are headed up. If the chatter is about slow economic growth, rates are probably headed down.

But the minutes can be misleading as well. Just look at what happened in 2004. In May and June, Fed policymakers were becoming more anxious about inflation, according to the meeting records. Then, in September, they turned more dovish and started to worry about economic growth, again according to the minutes. Through it all, though, notes Louis Crandall, of consultants Wrightson ICAP, the central bank continued to raise interest rates by a quarter of a percentage point, a "measured" pace, at each meeting.

First Among Equals The Fed may be a democracy, but one policymaker's opinion counts far more than the others: Greenspan's. While that might change the closer he gets to retirement in January of next year, Fed insiders say as of now his views continue to dominate. Unfortunately, the minutes don't provide any clue as to what he's thinking because the document doesn't signal out individual policymakers by name.

Context Is King. A single meeting's minutes cannot be read in isolation. They have to be read in context of what came in the meetings before to best ascertain what they might mean for future monetary policy.

Putting this all together, how should one read the Dec. 14 meeting minutes that the Fed made public on Jan. 4? In a word, carefully. The financial markets were spooked because the minutes revealed that a number of policymakers were worried about the risks of faster inflation. But, apropos of the minutes' ability to contain muddled messages, the record also showed other Fed officials weren't as concerned. In the end, everyone agreed to a statement saying inflation remains well contained.

According to the minutes, some members of the policymaking committee wanted to junk the Fed's promise to raise rates at a "measured" pace. That fanned financial market fears that the central bank was about to embark on a more aggressive tightening campaign. On Jan. 4, stock prices sank after the release of the Dec. 14 minutes, and the Dow Jones industrial average ended the day 100 points down. But this isn't the first time that some Fed officials have tried to do away with that commitment, according to minutes of meetings past. And in each case, they've failed.

So what's the bottom line? Don't read too much into the minutes. The Fed's strategy of "measured" rate hikes remains in place. Expect a quarter-point increase at the next meeting on Feb. 1-2. Miller is a senior writer for BusinessWeek in Washington


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