Coming just a week before the highly anticipated Jackson Hole Symposium and three weeks (and another strong NFP report) after the most recent FOMC meeting, today’s FOMC minutes always risked being outdated and stale. However, with the world’s most important central bank on the brink of significant policy change, with apparent disagreements within the committee, traders are always eager for more information as they gauge their expectations of a decline and (eventual) interest rate.
As a result, the minutes only highlighted the uncertainty of central bankers about the path of the economy and monetary policy in 2022. The minutes stand out:
- ‘…[M]Other participants noted that as long as the economy developed as broadly as they had anticipated, they felt it might be appropriate to start reducing the rate of asset purchases this year … ‘
- ‘Several others have indicated, however, that slowing down the pace of asset purchases would be more appropriate early next year’
- “Participants agreed that the Committee will give prior notice before changing its balance sheet policy”
- “Participants thought the recent prices were likely to be temporary”
- “Some participants expressed concerns that maintaining highly accommodative financial conditions could contribute to further accumulation of risk to the financial system, which could impede the achievement of the Committee’s two-term objectives.”
- “A pair of participants also noted that a decline in asset purchases did not mean a tightening of the monetary policy stance and instead only implied that additional monetary housing would be provided less quickly.”
- ‘Many participants noted that when a reduction in the speed of buying assets was appropriate, it would be important that the [FOMC] clearly reaffirm the absence of any … link between the time of decline and that of a possible rise in the … federal current exchange rate ‘
- ‘…[R]cases of COVID-19 associated with the spread of the Delta variant could cause delays in return to work and school and thus dampen the economic recovery “
Together, the initial reading of the protocol paints a mixed picture: while “most” Fed politicians are expected to start declining this year, there were still “several” who would prefer to wait until next year. Reading between the lines, however, the majority of U.S. central bankers seem to be comfortable starting to reduce QE this year if there are no major downside shocks to the economy.
Regardless, in the words of famed Fed observer Tim Duy ‘… at this point, the Fed is just working out the details. Except for some dramatic change in the economy, a decline in asset purchases will begin in the coming months and end in the middle of next year. The longer the Fed waits for a decline, the faster the decline will be. Everything else is only now academic. ‘
As we noted above, there were many reasons to believe that the minutes would not be a massive market, and that is exactly what we have seen so far. The market initially read the minutes as easier, causing a rapid rise in indices and gold as Treasury yields and the US dollar fell. However that movement quickly reversed and most major markets traded within a spitting distance of their pre-minute levels.
The focus is now shifting to next week’s Jackson Hole symposium, where traders will carefully scrutinize Fed Chairman Powell’s keynote speech for any suggestions on the timing of a short announcement.