There was a little-noticed but potentially important contradiction in the minutes released Wednesday by the Federal Reserve, raising questions about how the central bank will signal rate hikes to markets.
Here's what the Fed did: It said that it would not provide explicit guidance about when rates would go up. But in the same paragraph, a litter earlier, it said that rates were unlikely to go up in June.
That sounds a lot like explicit guidance. Following the logic, if in June the Fed "doesn't" say rates are unlikely to go up in July, markets could conclude that rates could rise at the next meeting.
The trouble for the Fed is that transparency could work at odds with its desired communications policy, which eschews telegraphing its next move.
Fed Chair Janet Yellen and others have expressed a distaste for how the Greenspan Fed handled the first and subsequent rate hikes in 2004. It gave markets a clear heads-up that rates would rise by using the phrase: "the committee believes that policy accommodation can be removed at a pace that is likely to be measured."
When the Fed finally did hike in June 2004, The Wall Street Journal called it "an unprecedented Fed effort to telegraph its plans over recent months and minimize any shock to the markets." The phrase proved useful: It stayed in the statement from March 2004 through November 2005 as the Fed rate hike followed a predictable quarter-point track upward at each meeting.
Today's Fed doesn't look back fondly on the period. The concern is that the predictable rate hikes helped create financial excesses as investors took financial positions that relied on Fed certainty. That kind of certainty was deemed essential when the Fed was trying to stimulate the economy, but not so useful when it's trying to send rates the other way.
Having removed economic targets, dates and words describing time periods, the Yellen Fed took a stab in its new statement at data dependency orthodoxy. That is, the Fed offered no guidance except to characterize the economy. The Fed expects markets to read that economic description and weigh it against the Fed's stated criteria that it will hike when it has confidence that rates are moving up to 2 percent and that there has been further improvement in labor markets. If the answer to both is "yes," markets should expect a rate hike.
And then come the minutes that, at least to some extent, violate that orthodoxy by saying that June is unlikely. In truth, the Fed is going to have trouble not telegraphing the next meeting.
The minutes are, more or less, a representation of the discussion at the meeting, though some Fed observers believe they are edited to be consistent, or at least, not dramatically at odds, with current policy.
Fed officials around the table have to discuss not only their plan for rates at the current meeting but the next meeting, as well. And the minutes have to reflect that discussion. Either that, or they don't discuss what happens next at the meeting. Bottom line: Much as it may want to, the Fed cannot escape calendar-based guidance at least meeting to meeting. So the minutes now take center stage as the best way to know if rates are going up at the next meeting.