Your Ultimate Preview To Wednesday's Unusually Important Fed Minutes

When it comes to the Federal Reserve's monetary policy meetings (Federal Open Market Committee), most of the important information is published at the end of the meeting in the form of a brief statement.

However, ever since Chairman Ben Bernanke signaled in May that the Fed could soon taper its $85 billion of monthly bond purchases, economists have been carefully combing through every last clue coming from the FOMC and its members.

"While we still expect tapering to begin in Q4, with a “pre-announcement” at the September 18 FOMC meeting, we expect the July 30-31 minutes to keep alive the debate about timing," said UBS's Maury Harris.

Indeed, some Fed-watchers have noticed some subtle inconsistencies in the Fed's language about tapering and its timing.

"Recall that the July 31 FOMC policy statement communicated no bias to taper asset purchases later this year," noted Credit Suisse's Neal Soss. "The omission was notable, given that just six weeks earlier, after its June 19 meeting, the Committee deputized Fed Chairman Bernanke to discuss its conditional plans to scale back the pace of asset buying, with a view to potentially ending its purchases altogether by mid-2014. With no mention of these tapering expectations, the July 31 policy statement was considerably more dovish than it would have been otherwise."

So what was with that omission?

"Our assumption is that most policymakers at the time still expected to taper QE3 purchases as soon as September, but they were reluctant to put these plans in writing, preferring instead to leave their options open," added Soss.

However, if the markets assumed that the omission was a dovish signal, than they'll probably be taken aback if we do hear about tapering in the minutes.

"The minutes are likely to sound more hawkish – recall that has been the case all year long, in part because they give a platform to more hawkish non-voters – which presents a risk that markets will again sell off on the minutes," warned Michael Hanson of Bank of America Merrill Lynch.

We may have already gotten a tasted of that hawkishness from several Fed members who were happy to express their opinions through their various speeches, presentations, and interviews.

"Recent public comments from various policymakers suggest that even notable doves, such as Bullard, Lockhart and Evans, are comfortable with—but not yet committed to—a September taper," said Deutsche Bank's Carl Riccadonna."The lack of conviction largely stems from lingering uncertainty over the health of the labor market and the broader economy, so the August employment report (released on September 6) is likely to be the defining event."

So, regardless of what is revealed in the July FOMC minutes, there will still be a month's worth of data before the Fed announces whether or not it will begin tapering in September.

Nevertheless, economists will still be looking for new information.

Here's some of what the market economists will be looking for:

• Michael Hanson, Bank of America Merrill Lynch: "... We see the voting members largely split into two groups: those who emphasize the "cumulative progress" in the economy and thus favor tapering soon, even if the latest data disappoint slightly, and those who want to see "better momentum" and thus may prefer to wait. We recommend keeping a close eye out for discussions of what factors various members see as most important for the tapering decision – particularly interest rates, as the FOMC cited higher mortgage rates as a potential risk in their July statement."
• Neal Soss, Credit Suisse: "...Tempering any bearish discussion of tapering in the minutes would be any signals that the Committee is prepared to push out its forward guidance for rate hikes. For example, there may have been discussion in late July about possibly lowering the Committee’s 6.5% threshold for the unemployment rate at some point in the future.
  
  In analyzing the minutes, we will be paying particular attention to the distinction between the 19 FOMC “participants” and the Committee’s 12 voting “members.” Also, the choice of quasi-numerical modifiers such as “few”, “several”, “many”, etc. will be an important focus."
• Kris Dawsey, Goldman Sachs: "On forward guidance, we think it is likely that the Committee's July "reaffirmation" was a hint that enhanced forward guidance may be in the offing. This could potentially be expressed as an explicit reduction to the 6.5% unemployment threshold currently cited in the statement, or a more qualitative change to the language. Such a qualitative change could highlight the need to see a more broad based improvement in labor market indicators or a return of inflation toward the 2% target, in addition to unemployment below 6.5%. Changes in the minutes that would suggest a heightened probability of enhanced forward guidance could include many members emphasizing the importance of keeping the overall level of monetary accommodation high, despite a shift in the "mix" of accommodation, to borrow Chairman Bernanke's phrase. In addition, in the June minutes "some" felt that the improvement in broad labor market conditions was less than that implied by the decline in the unemployment rate alone. "A number" or "many" participants sharing this view could suggest a near-term change to the forward guidance.
  
  Other potential topics that may be addressed in the minutes include the degree to which MBS purchases and Treasury purchases may be tapered differently from one another (addressed further below), in particular in light of concern about higher mortgage rates, as well as guidance on when portfolio runoff may begin. Chairman Bernanke's recent remarks on the latter topic in his semiannual monetary policy testimony suggested that portfolio runoff would not start until rate hikes begin. This deviated from the June 2011 minutes' exit guidelines, which stipulated that portfolio runoff would begin before hikes to the fed funds rate."