Fed Minutes Show Doves Still in Charge, Employment Key To Taper

FS Insight Team

The Fed minutes have been released, and they showed that the market interpreted previous actions in a more "hawkish" context than was warranted. The doves remain firmly in control despite what may have been a tactical victory for the hawks on inflation. There appear to be seven members who are very hawkish and want to raise rates as early as 2022, whereas thirteen are now settled on 2023.

The headline of the minutes is still that the Fed may need to pull back support because of a stronger-than-expected economic recovery and levels of growth. Some hawkish Fed officials pointed to stronger than expected economic metrics as a reason to taper sooner, while others cited weaker than expected data in the jobs market. The tight labor market is complicated by empowered workers who appear to be quite confident to quit their current job to seek a better one. The "quit-rate" is just off its all-time highs but still high historically speaking.

One thing is clear from the minutes, those who expected sooner taper action will likely be disappointed. Despite the committee having some vocal hawks, it is clear that much more progress will be required on the employment front before that happens. Inflation has certainly had more strength and breadth than the Fed officials expected but the implication from the minutes is not one of panic. If Fed officials are concerned about 1970s-style Stagflation they aren't showing it in their public materials.

In fact, the officials were very concerned that their recent actions might be interpreted by the market as walking back from their near Adjustable Inflation Target framework. The Fed's commentary on inflation was pretty significant in its implications because the minutes clearly give the impression that if the Fed is not yet at its inflation target it will be soon. What this means is that there will be increasing focus on the employment side of things to determine the taper schedule.

On the other side of the pond, ECB officials are not in the Fed's camp on adjustable inflation. The ECB introduced a new policy framework that left many questions unanswered, but one thing was clear; our European counterparts will not be targeting inflation like the Fed plans to.

One source of concern is the housing market which is red-hot. The minutes definitely show some consternation amongst the hawks in this area, and the Fed's modern framework and thinking is largely inherited from its response to the Global Financial Crisis in 2008. There are definitely reasons to see the demand as more genuine than the active search for low-credit quality borrowers that marked the run-up to the crisis.

However, there are also reasons to pay legitimate attention to concerns as the numbers coming out of housing are definitely red-hot and raise a legitimate question as to whether a market performing so well needs government support. When tapering begins, because of these concerns, it is suspected that it will be a "two-speed taper" which mortgage purchases being curtailed at a faster rate than Treasury purchases.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.356%.

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