FOMC Minutes Show Fed Ready To Taper Earlier Than Anticipated

FOMC Minutes Show Fed Ready To Taper Earlier Than Anticipated

Since the last FOMC meeting (June 16th) – when Chair Powell admitted The Fed was talking about talking about talking about talking about tapering – bond (prices) have soared, gold has been dumped as the dollar surged…

Source: Bloomberg

As a reminder, stocks tanked right after the Minutes, exaggerated by Bullard’s hawkishness… but were miraculously saved coincidentally right at the moment when The PPT was called to The White House…

In recent days, the hawkish shift in market expectations that occurred right after the Fed meeting has waned a little…

Source: Bloomberg

Today’s Minutes will be all about how much “talking about” talking The Fed members actually did, what assets they discussed (MBS?), and how many of them are fearful of the bubble they’ve blown.

As a reminder, 13 of 18 officials projected they would raise interest rates from near zero by 2023, with most expecting to raise their benchmark rate by 0.5 percentage point. Seven expected to raise rates next year. In March, most officials expected to hold rates steady through 2023.

Inflation remains transitory, we promise…

“Although inflation had risen more than anticipated, the increase was seen as largely reflecting temporary factors, and participants expected inflation to decline toward the Committee’s 2 percent longer-run objective.”

… while the economy is still far from the Fed’s maximum-employment goal, suggesting the Fed is still some way away from signaling the tapering.

The Committee’s standard of “substantial further progress” was generally seen as not having yet been met, though participants expected progress to continue… Many participants remarked, however, that the economy was still far from achieving the Committee’s broad-based and inclusive maximum-employment goal, and some participants indicated that recent job gains, while strong, were weaker than they had expected. A number of participants noted that the labor market recovery continued to be uneven across demographic and income groups and across sectors.

Especially, with incoming data confusing:

“Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation….As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases.”

Borrowing a page of the ECB’s playbook, the Fed sees risks as broadly balanced, with inflation risks to the upside:

… participants judged that uncertainty around their economic projections was elevated. Although they generally saw the risks to the outlook for economic activity as broadly balanced, a substantial majority of participants judged that the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed

Still, there are clear concerns:

Several participants expressed concern that longer-term inflation expectations might rise to inappropriate levels if elevated inflation readings persisted.

If not so much about the job market, which remains muted (largely thanks to the Fed monetizing the government’s massive fiscal stimulus):

Many participants pointed to the elevated number of job openings and high rates of job switching as further evidence of the improvement in labor market conditions. Many participants remarked, however, that the economy was still far from achieving the Committee’s broad-based and inclusive maximum-employment goal, and some participants indicated that recent job gains, while strong, were weaker than they had expected. A number of participants noted that the labor market recovery continued to be uneven across demographic and income groups and across sectors.

Which brings us to the key point: ‘talking about’ the taper…

Participants discussed the Federal Reserve’s asset purchases and progress toward the Committee’s goals since last December when the Committee adopted its guidance for asset purchases.

The Committee’s standard of “substantial further progress” was generally seen as not having yet been met, though participants expected progress to continue. Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data. Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation. As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases.

On potentially talking even faster about the taper:

Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than-anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals.

On their asset purchase scheme…

“In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.”

And the timing of the taper…

“Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data.”

But no matter what, despite spooking markets last month, the Fed wants to underscore that its commitment to FAIT remains:

Some participants noted that communications about the appropriate path of policy would be a focus of market participants in the current environment and commented that it would be important to emphasize that the Committee’s reaction function or commitment to its monetary policy framework had not changed.

And since they are talking about tapering, it is notable that disagreement has emerged whether to start tapering with RMBS or all assets…

Various participants offered their views on the Committee’s agency MBS purchases. Several participants saw benefits to reducing the pace of these purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets. Several other participants, however, commented that reducing the pace of Treasury and MBS purchases commensurately was preferable because this approach would be well aligned with the Committee’s previous communications or because purchases of Treasury securities and MBS both provide accommodation through their influence on broader financial conditions. In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.

On housing bubble fears:

“Participants noted that overall financial conditions remained highly accommodative, in part reflecting the stance of monetary policy, which continued to deliver appropriate support to the economy. Several participants highlighted, however, that low interest rates were contributing to elevated house prices and that valuation pressures in housing markets might pose financial stability risks.”

On Administrated rates:

Participants had observed downward pressure on money market rates over the intermeeting period and viewed the possibility of further downward pressure on these rates in the near term as likely. Consequently, they noted that an adjustment to the Federal Reserve’s administered rates would help keep the federal funds rate well within the target range and support smooth market functioning of short-term funding markets.

And it would appear a standing unlimited repo facility is coming…

… a substantial majority restated their view, conveyed at the April 2021 meeting, that the potential benefits of such a facility outweighed the potential costs. Participants broadly supported the terms presented by the staff for such a facility

But some members remain as dovish as ever, hoping to remain at these extremes for longer…

“The Committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue.”

Developing…

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Full Minutes below (link):

Tyler Durden
Wed, 07/07/2021 – 14:07

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