The Daily Update: FOMC Talks Tapering

In what will surprise no-one, the main event of yesterday, the FOMC meeting minutes, showed that the members had a wide-ranging discussion about tapering in which Powell called the Fed’s first ‘deep dive’. The statement was backed up with an entire section devoted to the discussion of timing and composition of asset purchases aptly titled ‘Discussion of Asset Purchases’.

According to the minutes, ‘Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the employment market as not being close to meeting the Committee's 'substantial further progress' standard or because of uncertainty about the degree of progress toward the price-stability goal’.

On how they will taper, it looks as though most members are against the idea of tapering mortgage-backed securities before treasuries. They ‘saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally in order to end both sets of purchases at the same time’.

So, what can we take from the minutes? Well, they are talking long and hard about tapering, but in the end, there are still a lot of ifs, buts and maybes. Overall, they still judge the outlook uncertainty ‘quite high’ with the delta variant a worry. Of course, the other worry is inflation, but again on this the members are split. Some argue tapering should begin ‘relatively soon in light of the risk that the recent high inflation readings could prove to be more persistent than they had anticipated’. Although some members fear that we are past the peak and inflation will go back into a downward drift, especially if Covid cases keep rising, having a knock-on effect on economic growth.