Fed Minutes Provide Rough Contours of Tapering Discussion But Very Little Detail

Fed Minutes Provide Rough Contours of Tapering Discussion But Very Little Detail

The latest minutes of the Federal Reserve Open Market Committee came out earlier this week. Despite scant detail, there were indications that tapering would be announced and potentially even begin before the end of 2021. The minutes were largely backward-looking, though, and reflected a meeting that occurred before the extent of Delta’s impact was known.

The minutes did indeed show that most members think tapering was appropriate before the end of the year; however, since then, other developments have transpired. Dallas Fed President Kaplan, who is amongst the most hawkish members and had been leading the call for early taper, came out on Friday and said he is reconsidering his position given the rise of the Delta variant. If GDP growth significantly slows, he may favor postponing tapering until the economy is back on a firm footing.

This development makes it pretty unlikely that the market will be surprised by a preliminary tapering announcement in our estimation, but it is certainly possible. On the other hand, Delta may quickly collapse and have minimal effect on economic activity after all is said and done. Reductions in growth forecasts for 2021 have so far been pretty minimal. The 5-30 spread, which has historically moved in response to Fed actions, showed that the bond market feels it has a good handle on Fed actions.

Then again, some of the hawkish arguments have been evolving. Eric Rosengren, President of The Boston Fed, recently was interviewed by the Financial Times and gave a more nuanced reason to end tapering than those who are primarily worried about inflation. Rosengren said that asset purchases were much more effective in the wake of the Global Financial Crisis than they are now.

He believes the cost-benefit analysis is altered in tapering now compared to back then because of supply chain restraints, which inevitably means that the tapering is not having as much beneficial effect on real economic activity. He also said that a disproportionately positive impact on asset prices could be reversed in such a way as to undermine employment goals. He expects employment data in September will show sufficient strength to advance his position.

The minutes established that despite some hold-outs, the majority of the board favors winding down mortgage and treasury purchases at the same time. We had previously mentioned the possibility of a ‘two-speed taper’ where MBS purchases happened on an accelerated schedule compared to treasuries because of the housing market.

An important thing to remember is that once tapering begins, the Fed’s policy is not reversing from accommodative to tight; it is merely slightly reducing the pace of accommodation. There seems to be, from the minutes, a pretty significant consensus that asset purchases should be fully completed before the Federal Funds rate is raised.

Powell will speak at the Kansas City Fed’s Jackson Hole Symposium next week. That very anticipated event could shed some light on his thinking. The Fed Chairman also recently attended a virtual town hall with students and teachers.

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 1.283%.

Disclosures (show)

Stay up to date with the latest articles and business updates. Subscribe to our newsletter

Articles Read 1/2

🎁 Unlock 1 extra article by joining our Community!

Stay up to date with the latest articles. You’ll even get special recommendations weekly.

Already have an account? Sign In

Don't Miss Out
First Month Free