Federal Reserve officials at their July meeting planned to slow the pace of their monthly bond purchases likely before the end of the year, the minutes of the meeting released on Wednesday showed.
However, the summary of the July 27-28 meeting of the Federal Open Market Committee’s meeting showed that central bankers wanted to make it clear that asset reductions or reductions were not a precursor to an impending rate hike. The minutes found that “some” members preferred to wait until early 2022 to start reducing.
“Looking to the future, most of the participants noted that, in their view, it might be appropriate to slow the pace of asset purchases this year, provided that the economy performs broadly as expected,” the inflation target stated in the minutes was “almost satisfied” with progress in employment growth.
However, committee members largely agreed that employment did not meet the Fed’s “significant further progress” benchmark before considering a rate hike.
In response to interest rate concerns, committee members also stressed the need to “reaffirm the lack of any mechanical link between the timing of the reduction and a possible increase in the target rate range”.
Fed officials have repeatedly said that a tightening will come first, with rate hikes unlikely until the process is complete and the central bank stops adding to its balance sheet.
Markets rallied shortly after the minutes were released, but then turned negative again, with the Dow Jones Industrial Average dropping more than 150 points.
At the meeting, the FOMC voted to keep short-term interest rates close to zero while being optimistic about the pace of economic growth.
While the message has been telegraphed through the tapering, the Fed has a difficult communication job to ensure that its strategy is clearly outlined. There are concerns in the market that the Fed may keep its pace of slowing down even if the economy weakens.
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The post-meeting statement painted a generally optimistic view of the economy, but the minutes contained some concerns.
Officials rated the outlook “fairly high” with the Covid-19 Delta variant being one challenge and inflation another. Some members noted “upside risks to inflation,” particularly that the conditions that Fed officials have described as temporary may last longer than expected.
Those worried about inflation said the throttling “should start relatively soon, given the risk that recent high inflation data may prove more persistent than they expected”.
Significant disagreements were noted in the minutes, however, with some members even fearing that inflation could fall again if Covid cases continue to rise and potentially dampen economic growth.
While the market expects to rejuvenate soon, it does not see any rate hikes for at least another year. Futures contracts pegged to the Fed’s benchmark interest rate discount a 50% chance of a rate hike in November 2022 and a 69% chance of a hike in the next month.
There was also talk of “elevated valuations” across all asset classes, with some members worrying that the Fed’s loose policy would raise prices and threaten financial stability.
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