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FOMC Minutes: It could be appropriate to start tapering the asset purchases this year

  
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The FOMC meeting minutes for the July 27-28, 2021 meeting

The FOMC meeting minutes for the July 27-28 meeting have been released. Since the minutes are not released ahead of time, the highlights will be trickling in.
You can find the minutes HERE.
Some highlights:
  • Participants expressed a range of views on the appropriate pace of tapering asset purchases once economic conditions satisfied the criterion laid out in the Committee’s guidance.
  • At the same time, participants indicated that the standards for raising the target range for the federal funds rate were distinct from those associated with tapering asset purchases and remarked that the timing of those actions would depend on the course of the economy.
  • Several participants noted that an earlier start to tapering could be accompanied by more gradual reductions in the purchase pace and that such a combination could mitigate the risk of an excessive tightening in financial conditions in response to a tapering announcement.
  • Most participants remarked that 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.
  • Several participants commented on the benefits that they saw in reducing agency MBS purchases more quickly than Treasury securities purchases, noting that the housing sector was exceptionally strong and did not need either actual or perceived support from the Federal Reserve in the form of agency MBS purchases or that such purchases could be interpreted as a type of credit allocation.
  • Many participants noted that, when a reduction in the pace of asset purchases became appropriate, it would be important that the Committee clearly reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate.
  • With respect to the effects of the pandemic, several participants indicated that they would adjust their views on the appropriate path of asset purchases if the economic effects of new strains of the virus turned out to be notably worse than currently anticipated and significantly hindered progress toward the Committee’s goals.
  • The staff judged that asset valuation pressures were elevated. In particular, the forward price-to-earnings ratio for the S&P 500 index stood at the upper end of its historical distribution; high-yield corporate bond spreads tightened further and were near the low end of their historical range; and house prices continued to increase rapidly, leaving valuation measures stretched. That said, the staff did not see signs of loose mortgage underwriting standards or excessive credit growth that could potentially amplify a shock arising from falling house prices.
  • 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.
  • The staff expected the 12‑month change in PCE prices to move down gradually over the second part of 2021, reflecting an anticipated moderation in monthly inflation rates and the waning of base effects; even so, PCE price inflation was projected to be running well above 2 percent at the end of the year.
  • Over the following year, the boost to consumer prices caused by supply issues was expected to partly reverse, and import prices were expected to decelerate sharply; as a result, PCE price inflation was expected to step down to a little below 2 percent in 2022 before additional increases in resource utilization raised it to 2 percent in 2023.
  • The staff continued to judge that the risks to the baseline projection for economic activity were skewed to the downside and that the uncertainty around the forecast was elevated. In particular, the probability that the course of the pandemic would turn out to be more adverse than the staff’s baseline assumption was viewed to be higher than the probability that a more favorable outcome would occur.
  • the staff judged that the risks around the inflation projection were now tilted to the upside, as recent data pointed to a greater risk that the upward pressure on inflation that had resulted from supply-related issues would unwind more slowly than the staff’s baseline projection assumed.
  • A majority of participants noted that the spread of the Delta variant may temporary delay the full reopening of the economy and restraint hiring and labor supply

The WSJ said:

  • Minutes show thinking on preparations to begin reducing Federal Reserve’s asset purchases later this year
  • Federal Reserve preparing for taper this year, July minutes show
  • central bankers want to be clear that the reduction of assets was not a precursor to and a minute rate hike
  • Fed officials see inflation goal hit, divided on taper.

Federal Reserve to buy Treasuries and MBS ‘at least at the current pace’

  
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Highlights of the June 10, 2020 FOMC interest rate decision

  • Will increase holdings of bonds ‘over the coming months’ at least at the current pace to smooth markets
  • Buying will continue across curve
  • Dots pin rates at zero through 2022 but two dots show lift-off in 2022
  • Rates unchanged, as expected
  • Repeats pledge to use full range of tools to support US economy
  • Repeats that health crisis will weigh heavily on activity and poses considerable risks to the outlook over medium-term
  • Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
  • Prior statement
  • Powell will hold a press conference at the bottom of the hour
The Fed has tapered to $4B/day from a high of $300B/day and there was some expectations they would continue to taper but they are going to keep QE here, which is around $80B per month.
I don’t see anything negative for the market here. The dots are zeroed out and the Fed is going to keep the printer running.

The FOMC September 2019 full statement

  
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FOMC statement from the September 2019 rate decision

Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.

US stocks mixed as attention turns to Fed

  
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US stocks were mixed as Federal Reserve officials cast doubts on further rate cuts and a reading on domestic manufacturing stoked concerns over the health of the economy. The S&P 500 ticked 0.1 per cent lower after drifting between gains and losses, with investors turning their attention to the central bank’s annual summit where chairman Jay Powell will speak on Friday. The Nasdaq Composite was down 0.4 per cent, while the Dow Jones Industrial Average rose 0.2 per cent on a rally in shares of Boeing. Central bankers from around the world have descended on Jackson Hole, Wyoming, for a policy symposium that is closely watched by investors seeking clues on monetary policy.

Market participants are looking for the Fed to follow its July rate cut with another one in September, but at the start of the Jackson Hole gathering on Thursday, Philadelphia Fed president Patrick Harker and Kansas City Fed president Esther George indicated in television interviews that they would not back further cuts. “My sense was we’ve added accommodation, and it wasn’t required in my view,” Ms George, one of two dissenters in the July decision, told CNBC. Mr Harker, who is not a voting member of the Fed’s policy setting committee, said he believes the federal funds rate is around its neutral level, adding: “I think we should stay here for a while and see how things play out.” The US 10- and two-year yield curve inverted for the second time this week following the remarks. The yield on the benchmark 10-year Treasury rose 3.3 basis points to 1.6097 per cent, while the policy-sensitive two-year yield was up 4.5bp at 1.6141 per cent. An inverted yield curve is considered a sign that investors expect a recession.

Upcoming Week : Cutting to the Quick

  
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Central banks are prepared to take fresh measures to strengthen and extend the business cycle primarily because price pressures are below what their predecessors thought would be acceptable levels. Draghi, speaking for the ECB, the Federal Reserve, and the Bank of Japan ratcheted up their concerns, which, even without new initiatives, were sufficient to drive interest rates lower.
There is no real definition of many terms economists throw around like recession or depression.  The “two negative quarters of declining GDP” is not a technical definition but a rule of thumb.  Ironically there weren’t recessions before the Great Depression.  The end of business or credit cycles were called panics and crises.  The use of “recession” appears to have been applied to economies to distinguish the end of the business cycle from the Great Depression.  Neither the US nor Europe seems to be on the verge of an economic contraction.  Given a shrinking population, the Japanese economy can contract, and per capita GDP can still rise.
The Bundesbank warned last week that the German economy may have contracted in Q2, but the eurozone flash composite PMI suggests the region expanded.  Although the composite PMI averaged 51.8 in Q2, following a 51.5 average in Q1, GDP growth maybe half of the 0.4% in recorded in the first three months of the year.
The most important data point for the eurozone next week is the flash CPI reading.  Some may see it as a non-story as headline inflation is expected to remain at 1.2% and the core rate at 0.8%.  Unchanged data is the story.  Draghi was clear: if conditions do not improve, the ECB needs to provide more stimulus.

(more…)

Fed’s Bullard and Kashkari make case for rate cut

  
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Slowing growth momentum and the lack of inflationary pressure are fuelling the case among Federal Reserve policymakers that a rate cut may be necessary this year in order to stimulate the economy.

A duo of Fed officials — St Louis Fed president James Bullard and Minneapolis Fed president Neel Kashkari — on Friday cited rising global uncertainty as a reason the US central bank should take immediate action to lower rates.

At its latest policy meeting this week, the Federal Open Market Committee voted 9-1 to hold rates steady but signalled a strong possibility of cutting them this year.

Mr Bullard, one of the most dovish members of the Fed board, was the lone dissenter. He said on Friday he pushed for a quarter-percentage point cut at the meeting in order to safeguard against weaker growth, tepid inflation and an increasingly volatile environment.

“I believe that lowering the target range for the federal funds rate at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks. Even if a sharper-than-expected slowdown does not materialise, a rate cut would help promote a more rapid return of inflation and inflation expectations to target,” he said in a brief statement posted on his bank’s website.

Mr Kashkari, a non-voting member of the FOMC, went even further. In an essay published on Friday, he said he argued at this week’s meeting for a 50 bps cut in order to “re-anchor” inflation expectations. (more…)

Federal Reserve Raises Discount Rate

  
Analysis, Economy, Education, US Market
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breaknnews

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. (more…)

Fed holds rates, maintains ‘extended period’ language

  
Analysis, Economy, Education
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Here’s the FOMC statement in full:

Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. (more…)

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