Coming just a week before the highly-anticipated Jackson Hole Symposium and three weeks (and another strong NFP report) after the most recent FOMC meeting, today’s FOMC minutes always ran the risk of being dated and stale. Still, with the world’s most important central bank on the verge of a significant policy shift, with apparent disagreements within the committee, traders are always keen for more information as they calibrate their expectations for tapering and (eventual) interest rate liftoff.
As it turns out, the minutes only emphasized the central bankers’ uncertainty about the path of the economy and monetary policy heading into 2022. Highlights from the minutes follow:
- “…[M]ost participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year…”
- “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year”
- “Participants agreed that the Committee would provide advance notice before making changes to its balance sheet policy”
- “Participants felt that the recent price readings were likely temporary”
- “A few participants expressed concerns that maintaining highly accommodative financial conditions might contribute to a further buildup in risk to the financial system that could impede the attainment of the Committee’s dual-mandate goals”
- "A couple of participants also noted that a tapering of asset purchases did not amount to a tightening of the stance of monetary policy and instead only implied that additional monetary accommodation would be provided at a slower rate"
- “Many participants noted that, when a reduction in the pace of asset purchases became appropriate, it would be important that the [FOMC] clearly reaffirm the absence of any...link between the timing of tapering and that of an eventual increase in the...federal funds rate”
- “…[R]ising COVID-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school and so damp the economic recovery"
Taken together, the initial readthrough of the minutes paints a mixed picture: while “most” Fed policymakers are expecting to start tapering this year, there were still “several” who would prefer to wait for next year. Reading between the lines though, the majority of US central bankers appear to be comfortable starting to reduce QE this year as long as there are no major downside shocks to the economy.
Regardless, in the words of noted Fed watcher Tim Duy “…at this point, the Fed is just working out the details. Barring some dramatic change in the economy, tapering of asset purchases will begin in the next few months and end by the middle of next year. The longer the Fed waits to taper, the faster the taper. Everything else is just academic at this point.”
As we noted at the top, there were plenty of reasons to believe the minutes wouldn’t be a massive market mover, and that’s exactly what we’ve seen so far. The market initially read the minutes as more dovish, leading to a quick uptick in indices and gold while Treasury yields and the US dollar dipped. However, that move was quickly reversed and most major markets are trading within spitting distance of their pre-minutes levels.
The focus now shifts to next week’s Jackson Hole Symposium, where traders will closely scrutinize Fed Chairman Powell’s keynote speech for any hints about the timing of a taper announcement.
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