Fed’s “footnotes” in yesterday’s minutes from the September meeting worry markets

Reading the fine print is good advice when it comes to minutes from meetings of the Federal Reserve’s Open Market Committee too.

So far today, October 18, the financial markets are in a slight retreat because of notes released yesterday along with the minutes of the Fed’s September 26 meeting.

The notes to the Fed’s most recent economic projections said “A substantial majority of participants expected that the year-end 2020 and 2021 federal funds rate would be above their estimates of the longer-run rate.”

In other words in the medium term the Fed might decide to move, temporarily, to an interest rate high enough to count as “restrictive” before pulling back to a “neutral” rate. For a while now the Fed’s thinking has pointed to 3% as a longer term neural rate.

To continue with this point, according to the minutes, “A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level.”.

To be completely accurate, no one really knows what this statement means. It could mark the emergence of a group of Fed officials who believe that a relatively brief move to a restriction interest rate policy might be necessary to put an end of any expectations for rising inflation.

Or it could mean that different groups at the Fed are in essential agreement but are using different language to describe their positions.

My own belief is that the Fed is grappling with tough questions about where to take policy from here and how big an insert rate increase is necessary too head off creeping inflation expectations and how big an increase the economy could absorb without a painful slowdown in growth.

Today the bond market has reacted by sending the yield on the Fed-sensitive 2-year Treasury note up to 2.88% and sending the yield on the longer term 10-year note down 3 basis points to 3.18%.