Which way will the Federal Rserve fly? (Photos from left to right by Navesh Chitrakar/Reuters and Dan Kitwood/Getty Images)

The Federal Reserve made few waves when its top brass met in Washington last month for their regular policy-setting meeting. Its target interest rate — pegged at zero since the financial crisis — remained unchanged, and the central bank’s official statement offered few clues of when it might rise.

But the minutes of the July meeting, released Wednesday afternoon, show that Fed officials were busy making preparations behind the scenes as they inched closer to increasing the benchmark rate for the first time in nearly a decade. Many economists and investors think the Fed could move at its meeting next month. The minutes made clear that officials needed more data before deciding — but also that they wanted to ensure everything was ready to go if they did.

Soon … but not now.
The minutes put this pretty bluntly: “Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.”

The baseline case outlined in the minutes forecasts that the economy will pick up steam during the second half of the year, resulting in continued growth in hiring and declines in the unemployment rate. A stronger labor market, in turn, will help push inflation back up to the Fed’s target of 2 percent.

The minutes say that  “many” participants are “looking for evidence that the economic outlook was evolving as they anticipated.” In other words, they are simply waiting for confirmation. The few who voiced concerns were mainly worried about inflation. Some suggested that a tighter job market might not result in higher inflation, pointing to broader global forces — think plunging oil prices, China’s economic slowdown — that might hold down prices. But a couple of participants worried that waiting too long to raise the Fed’s target rate could cause inflation to jump or seed financial instability.

Officials remain puzzled about workers’ stagnant wages, the minutes show. But many see the labor market as closing in on full employment. The Fed altered its description of the conditions it would like to see before raising its target rate to say “some” further improvement is needed, a reflection of the progress the job market has made so far, according to the minutes.

Still, only one member of the Federal Open Market Committee was ready to raise rates at the July meeting — our money is on Richmond Fed President Jeffrey Lacker — and that person was willing to wait for more data. 

Change the focus
The Fed has tried to steer the market’s attention away from the exact timing of the first rate hike to the size and timing of future increases. Instead of obsessing over September or December, the argument goes, Wall Street should focus on the Fed’s stated commitment to raising rates only gradually.:

“It was also noted that the Committee’s communications around the time of the first rate increase should emphasize that the expected path for policy, not the initial increase, would be the most important determinant of financial conditions and should acknowledge that policy would continue to be accommodative to support progress toward the Committee’s dual objectives.”

This is reminiscent of former Fed board chair Ben Bernanke’s mantra that tapering the Fed’s purchases of long-term bonds was not the same as tightening. The goal in both cases is to prevent investors from overreacting to every twitch of Fed policy.

Revamped forecasts
A subcommittee on communications at the Fed has been looking at ways to revamp the Fed officials’ quarterly forecasts. Currently, each of the Fed’s 17 top officials submit their forecasts for a range of economic indicators. The Fed publishes the highest and lowest numbers and the “central tendency” -- the range excluding the three highest and three lowest projections. Analysts and financial media then calculate the midpoint of the central tendency as a convenient single number that summarizes the Fed forecast.

If it sounds complicated, that’s because it is. Starting in September, the central bank will simplify the process by publishing a median forecast for each indicator that it believes “would provide a more robust summary measure of the distribution of participants’ views.”

Interest rates will change all at once
The Fed’s benchmark rate is the federal funds rate, but the central bank also controls several other banks that are designed to help ensure it can unwind its crisis-era policies despite having a massive balance sheet. The minutes show that Fed officials unanimously supported altering the interest rate on reserves, the overnight reverse repo rate and the primary credit rate on the day after a change to the federal funds rate.

Reinvestments: The last taper?
As for the Fed’s massive balance sheet, the central bank had deflected questions about how to shrink it back to a more normal size as something to consider for after the first rate hike. As that draws near, the Fed is once again debating how to tackle its $4 trillion balance sheet.

The Fed is maintaining the current size by reinvesting securities while they mature. Fed officials still think that should hold steady during the “early stages of normalization,” the minutes show. But they are leaning toward establishing a “qualitative assessment of economic conditions and the outlook” as the guideposts for when they will start letting the balance sheet run off.

It also seems unlikely at this point that the Fed will stop the reinvestments cold turkey because that might be too disruptive to markets. The minutes state: “Most participants thought that it might be best to either wind down reinvestments or to manage them in a manner that would smooth the decline in the balance sheet in a predictable way.”

Finally, though Fed officials note it would be simplest to treat their purchases of Treasurys and mortgage-backed securities in the same way, they seemed willing to consider different strategies for each because of “market-specific considerations.”