FOMC Minutes to be Scrutinized Tomorrow

When released Tuesday, the minutes from the FOMC's March 18 meeting are likely to be scrutinized for indications of the Fed's economic outlook at the time of its last 75 basis point cut, as well the degree of divergence amongst committee members, economists say.

Economists say the minutes from the meeting may provide clearer insight into the reasoning for the 75 bps easing, and where the Fed is likely to move next.

"After the Fed lowered its Funds rate by 75bp � less than the market had anticipated � we will pay careful attention to how much of this move was dictated by a fear of disappointing markets and/or the need to maintain an aggressive posture versus a real expectation that the additional rate cut would bolster economic activity," noted economists from Lehman Brothers.

"Of course the greatest issue facing the Fed is the dysfunction in credit markets, which is limiting the effectiveness of rate cuts. As such, we will look for any references to credit conditions and to how the Federal Reserve views the effectiveness of monetary policy," they continued.

Also of interest will be further insight into the degree of opposition to the current rate of easing, given that FOMC members Richard Fisher and Charles Plosser voted against the last decision. The accompanying statement on March 18 said the men preferred "less aggressive action."

"We hope the minutes will clarify exactly what that means," said Julian Jessop, an economist at Capital Economics. "Were Fisher and Plosser looking for a more modest 50bp cut, or wanting to leave rates unchanged?

Jessop noted the accompanying statement was more hawkish on the upside risks to inflation, noting that expectations may be rising. "It will be interesting to learn how widely those concerns were shared among Fed officials," he noted. "Was the tone of the statement forced through by Fisher and Plosser, or are these concerns shared by the majority of the voting members?"

Gian Espejo, senior dealer at GCI Financial Ltd., said the minutes are also likely to acknowledge that the initial 50 bps of monetary stimulus delivered on Sept. 18 is now impacting the economy and that more easing is still "in the pipeline."

Espejo said the minutes may also acknowledge that with the most recent cuts, the federal funds rate is slightly negative.

"The usual suspects including credit dislocation, the beleaguered housing market, elevated interbank lending rates, etc. will take center stage," he said. "A 25bps - 50bps move on 30 April is likely especially after Friday's weak NFP print and look for term credit facilities to continue for commercial and investment banks. The U.S. is far from being out of the woods."

The Fed's next rate decision is on April 30 and markets are currently pricing in a 65% chance of a further 50 bps rate reduction.

By Stephen Huebl and edited by Cristina Markham