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The minutes from the last US Federal Reserve meeting reveal that, while no firm decisions were made, “most participants… judged that it could be appropriate to start reducing the pace of asset purchases this year”. This means that as the US economy recovers from the Covid crisis, America’s central bank will start pulling back some of the massive economic stimulus it has introduced – earlier than expected.
However, this doesn’t mean that the Fed will raise interest rates more quickly. The minutes show that many officials believe that the Federal Open Market committee (FOMC) should “clearly reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in… the federal funds rate”.
Andrew Hunter, senior US economist at Capital Economics, Hunter doesn’t expect interest rates to be raised until 2023. He explains the Fed’s thinking:
With a growing number of officials now openly discussing the possibility of tapering beginning soon on the back of July’s strong employment report, it looks more likely than not that the wind-down will begin later this year, rather than early next year as we had previously thought.
A final decision won’t be made until the September FOMC meeting at the earliest and will probably depend on another solid rise in payrolls in August, but Fed Chair Jerome Powell could now use his Jackson Hole speech next week to drop a stronger hint that tapering is on the way.
Officials seemingly didn’t come to any firm decisions on the pace or composition of tapering either, but the minutes do at least appear to put to bed the idea that the Fed’s $40bn monthly MBS [mortgage-backed securities] purchases could be reduced quicker than their $80bn of Treasury purchases, with most officials in favour of reducing them at the same rate.
While there is clearly support from some of the more hawkish officials for a relatively quick taper finishing early next year – leaving plenty of scope for rate hikes to potentially begin later in 2022 – the minutes also noted that “several” officials thought that “an earlier start to tapering could be accompanied by more gradual reductions in the purchase pace”. On balance, we still expect the run-down to last 9 months which, if it began within the next few months, would point to a mid-2022 end-date.
James Knightley, chief international economist at ING, says:
The minutes to the July FOMC meeting show a Fed that is pretty split on most things, but recognises that we are getting much closer to the point of tapering. Officials have offered more vocal support in recent days to earlier action and we are pencilling in a September announcement, but it is clear that the Covid resurgence could delay it.
Asian shares fell on the news, with Japan’s Nikkei and the Singapore market both losing 1.1% and Hong Kong’s benchmark shedding 1.8%.
Oil prices are down for a sixth day, the longest losing streak since February 2020, as rising Covid cases sparked fears over slower fuel demand while a surprise increase in US gasoline inventories added to the pressure. Slower growth in China, the world’s biggest oil importer, is weighing on the market in particular.
Brent crude fell as low as $67.10 a barrel, the lowest since late May, and is now trading about a dollar lower at $67.21 a barrel, a 1.5% drop. US crude has lost $1.27 to 64.19 a barrel, a near-2% decline.
Attention will now turn to next week’s Jackson Hole central bank symposium, which should offer further clues about the Fed’s timelines to a slowdown in the pace of monthly asset purchases.
Today’s focus will be on the latest US weekly jobless claims which are expected to come down further to 363,00.
The Agenda
- 1.30pm BST: US Initial jobless claims for week of 14 August (forecast: 363,000)
- 3pm BST: US Conference Board Leading Index for July (forecast: 0.8%)