The Daily Update: The Fed's Illustrative Path

The minutes from September’s FOMC meeting were released yesterday, providing more details on the committee’s tapering thoughts, employment targets as well as their inflation outlook. The minutes confirmed that although there was no decision at the September meeting to start tapering it would in all probability start soon. The committee noted ‘No decision to proceed with a moderation of asset purchases was made at the meeting, but participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate. Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December’.

The minutes also outlined an ‘illustrative path’ of taper, stating that the path should be simple, on a monthly basis and entail reductions in $10bn/$5bn increments of Treasury/Mortgage-Backed Securities. ‘The illustrative tapering path was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchase. The path featured monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities’

On Inflation, the members observed that the inflation rate was elevated, and they expected that it would likely remain so in coming months before moderating. They noted ‘the staff's near-term outlook for inflation was revised up further in response to incoming data, but the staff continued to expect that this year's rise in inflation would prove to be transitory’. However, they warned that the risks around inflation ‘were tilted to the upside, with the possibility of more severe and persistent supply issues viewed as especially salient’.

Lastly, on jobs it was stated ‘With regards to employment with regard to the Committee's maximum-employment goal, participants considered the cumulative degree of improvement in the labour market since December 2020. In doing so, participants cited the progress recorded in a number of individual series, including, among others, the employment-to-population ratio, the unemployment rate, claims for unemployment insurance, job openings, nominal wage growth, and increases in payrolls, as well as in summary measures of the labour situation’.