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Fed minutes guide: Job gains may signal when patience runs out

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(Bloomberg) — Here’s what to look for when the Federal Reserve releases minutes from the Federal Open Market Committee’s Jan. 27-28 meeting at 2 p.m. Wednesday in Washington.

– The limits of patience. The minutes will probably reveal a “tightening bias” at the meeting, which will have been reinforced the following week by news of stronger-than-forecast jobs growth in January, said Thomas Costerg, an economist at Standard Chartered Bank in New York.

The FOMC’s statement after its January meeting reiterated the previous month’s stance that the committee would be “patient” in deciding when to begin raising interest rates, and it described job gains as “strong.” A Labor Department report on Feb. 6 showed payrolls advanced by 257,000 in January, capping the biggest three-month increase in 17 years.

“If you read the minutes in conjunction with the payroll data, it may pave the way for the removal” of the word “patient” from the statement in March in order for the committee to keep the door open to a mid-year rate increase, Costerg said. Fed Chair Janet Yellen has said “patient” implies the Fed won’t raise rates for at least the next two meetings.

– Inflation outlook. Watch for indications policy makers are resolved to look beyond the current weakness in inflation as they consider when to tighten.

“Anything that gives us a sense of how willing they would be to hike, even against a low-inflation backdrop, will be important,” said Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut.

Inflation goal

The Fed’s preferred measure of inflation, based on personal consumption expenditures, rose 0.7 percent in December from a year earlier and hasn’t been above the central bank’s 2 percent target since March 2012. Even so, several Fed officials have said the U.S. central bank’s first interest-rate increase in almost a decade may come as soon as June.

“The big question in everybody’s mind is: Can they raise interest rates without more tangible evidence, either in terms of wages or with the inflation numbers, that things are moving in the right direction?” Girard said.

– Labor slack: The minutes will probably show continued debate over the quality of job gains and the implications for wage growth, Girard said.

“Any discussion on wage growth is going to be very important for the market,” she said. While average hourly earnings in January rose by the most since November 2008, “it’s hard to say that there is an uptrend unfolding.”

Cheap energy

– Oil impact: Fed officials seem to be largely in agreement that the decline in oil prices is a clear positive for the U.S. economy based on public remarks, said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. The minutes may reveal a more nuanced discussion, he said.

“The negative effects of lower prices should begin to be felt in coming months,” Vitner said. “I will be looking at any discussion related to the risks and benefits from the sharp decline in oil prices to get an idea on how the Fed views this.”

– International developments: The minutes could show less concern about events overseas than market participants originally thought, said Gennadiy Goldberg, a U.S. strategist at TD Securities USA LLC in New York.

In January, the FOMC added “international developments” to the list of considerations in its policy statement that the committee weighs in its decision making.

Strong dollar

“You will get some discussion about how the stronger dollar could actually start to influence the U.S., but I don’t think they will show a very large degree of concern,” Goldberg said. “If the minutes actually show that the Fed isn’t really as concerned as the market took that, it could help to bring forward expectations” for the timing of the first rate increase, he said.

– Communications: The minutes may reveal further discussion about the calendar-dependent nature of the “patient” language, said Tim Duy, an economics professor at the University of Oregon in Eugene and a former U.S. Treasury Department economist. He said the phrase is at odds with Fed efforts to convince investors a decision to raise rates depends on how economic data unfold and isn’t tied to a specific date.

“How will they transition to data-dependent if they keep making date-dependent predictions?” he said in an e-mail. “Do they really intend to signal policy intentions two meetings ahead?”