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Mohamed El-Erian: What the Fed Minutes Tell Us
Aspire, Thought Leaders | 25 May 2015

Here are seven takeaways from the minutes of the April 28-29 meeting of the Federal Open Market Committee released Wednesday.

Federal Reserve officials attribute part of the recent economic slowdown to “transitory factors,” which they consider likely to prove both temporary and reversible. This characterization also applies to household spending, which is viewed as “partly or even largely transitory.” They said they expected “real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further.”

1. The international context isn’t helpful to the U.S. economy. Fed officials deem “foreign economic and financial developments” as constituting “potential downside risks,” and they specifically mention Greece and China. Moreover, despite its recent partial retracement, the dollar’s appreciation is “likely to continue to be a factor restraining U.S. net exports and economic growth for a time.”

2. They remain relaxed about the prospects for higher prices and expect the inflation rate to “rise gradually” toward the Fed’s 2 percent objective. Deflation or high and unstable inflation aren’t viewed as constituting material risks.

3. Financial stability is a concern for the FOMC. Members specifically pointed to low risk premiums that could well reverse “when the Committee decides to begin policy firming.” In conveying this message, they are reminding markets of the “Taper tantrum” in 2013, when investors altered their perception of the Fed’s policy course, leading to sharp price moves and some market dislocations. There is also a hint of concern about liquidity risk, which is also appropriately a preoccupation for a growing number of central bankers around the world.

4. The FOMC has yet to agree on a date to start the interest-rate increase cycle. Although June hasn’t been ruled out, the minutes suggest very limited appetite for moving then. This interpretation is consistent with the range of views expressed by FOMC members about how best to signal that an increase is in the offing — especially as “most participants” seemed keen to retain the option of deciding “on a meeting-by- meeting basis,” depending on “the evolution of economic conditions and the outlook.”

5. Uncertainty isn’t limited to the timing of the first rate increase. Central bankers are also actively discussing the final destination, given that “estimates of such equilibrium interest rates were highly uncertain.”

6. Behind the scenes, and recognizing the uncertainties ahead, Fed officials have been “testing normalization tools,” such as charges on bank reserves. Assessing this process, FOMC members have increased their comfort that, once the decision is made to initiate the rate-hike cycle, the tools available will have “created conditions under which policy normalization would likely proceed smoothly.”

All in all, the Fed remains cautious and data-dependent. Officials are encouraged but not overly confident about U.S. economic prospects. While they are eager to learn more in coming weeks, Fed policy makers are inclined to initiate an interest rate hiking cycle later this year, absent some unexpected weakening of the U.S. economy due to either domestic or international developments. But there will be nothing traditional or automatic about this cycle compared with previous ones. It will be highly conditional, involve a very shallow path, and be subject to incessant examination and possible course correction. As a result, it will be known as the loosest tightening in the modern history of central banking.

To contact the author on this story: Mohamed El-Erian at

To contact the editor on this story: Max Berley at

Mohamed El-Erian is the chief economic adviser at Allianz SE. He’s chairman of Barack Obama’s Global Development Council, the author of best-seller “When Markets Collide,” and the former chief executive officer and co-chief investment officer of Pimco.

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