After two meetings where they religiously avoided discussion of slowing down asset purchases, minutes of the Federal Reserve’s June meeting showed officials dove into the debate about when and how to taper.
The Fed is holding its policy interest rates close to zero and buying $120 billion of Treasurys and mortgage-backed securities each month to bolster the economy. The central bank said it would keep up the pace of purchases until “significant” progress was reached on the labor market and inflation.
With inflation surging, many economists think it is time for the Fed to move. But there is concern that any move to the exit could set off an outsized market reaction as it did in 2013.
The minutes show “various” officials said they thought the committee would meet the “significant further progress” condition to begin to reduce the pace of asset purchases “somewhat earlier” than they had anticipated. “Various” isn’t a term used often by the Fed and suggests perhaps many officials took this view.
But other officials saw the data as less clear and uncertain and urged patience on tapering. Economists think this includes Fed Chairman Jerome Powell and other leaders at the central bank.
“We think the voices pressing for patience will remain the most powerful, so the fall labor market data are key to how Fed policy will evolve later this year,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
At his last press conference, Powell said the Fed would go “meeting by meeting” and see if the conditions for tapering are met.
Michael Gregory, deputy chief economist at BMO Capital Markets, said in a research note he thought the Fed has satisfied its “substantial” progress goal on the inflation front. He said the labor market has “at least a month or two to go.”
Former Fed governor Rick Mishkin said he thought the Fed is eventually going to be “be mugged by reality” and forced to move soon because inflation is not as temporary as they think.
The core reading of the Fed’s favorite inflation measure — the personal consumption expenditure price index — was up at a 3.4% annual rate in May. The Fed’s latest forecast sees that rate slowing to 2% next year.
“”Demand has really jumped a lot because of very expansionary fiscal policy and pent-up demand” as consumers haven’t been able to spend during the pandemic, Mishkin said on Bloomberg Radio.
Fed officials generally agreed that “as a matter of prudent planning” it was important to be well positioned to reduce the pace of purchases, in case of unexpected progress towards the Fed’s goals. This suggests the Fed staff may prepare plans for the next Fed meeting on July 27-28.
“They had a discussion but nothing is imminent. There was no jumping up and down” about moving quickly, said Josh Shapiro, chief U.S. economist at MFR Inc, in an interview.
Several Fed officials said they would like to reduce the pace of mortgage securities “more quickly or earlier” in light of high home price rises, but other Fed officials pushed back, saying slowing down the purchases at the same pace was preferable. The Fed’s asset purchases are split between $80 billion of Treasurys and $40 billion of agency MBS each month.
Yields on the 10-year Treasury note
remained soft after the minutes were released but moved above the 1.30% level after pushing below it earlier in the trading session. The 10-year yields has declined by 40 basis points since late March. But at the same time, the market expects the Fed to move off of its accommodative stance earlier.
The Fed Funds futures markets are pricing a 63% probability of a one quarter-points rate hike by the end of 2022.
closed higher on Wednesday.
Powell is expected to speak at the Fed’s Jackson Hole summer symposium in late August and many Fed watchers think he might use that address to shed more light on the tapering plans.