Fed Minutes Show the Possible Start of Tapering in November

In the minutes of the Fed meeting in September, officials expressed the possibility of a beginning of tapering in mid-November.

The published minutes show that many officials have doubts about the exact date, but that November is also a good option for them:

"Regarding the outlook for monetary policy, market participants noted policymaker communications suggesting that tapering of asset purchases could begin this year and end by mid-2022. Around half of the respondents to the Desk’s surveys of primary dealers and market participants viewed December as the most likely timing of the first reduction in the net pace of purchases, although respondents also attached significant probability to the first reduction coming in November. Median expectations for the pace of net purchases were consistent with a gradual tapering of net purchases being completed in July of next year, about one to two months earlier than in the previous surveys."

The minutes indicate that the tapering process could see a monthly reduction of $ 10 billion in Treasuries and $ 5 billion in mortgage-backed securities. However, the minutes of the meeting also show that many officials expressed concern about inflation, saying it could last longer "than they currently assume." The expected end date for the purchases, assuming no disruptions, would be mid-2022.

Fed´s Staff Economic Outlook

  • In the second half of 2021, supply constraints were expected to resolve more slowly than previously assumed.
  • The meeting summary indicates that members believe the Fed is close to reaching its economic targets and could soon begin normalizing policy by reducing the pace of its monthly asset purchases.
  • Real GDP growth was projected to step down noticeably in 2023 and to be roughly equal to potential output growth in 2023 and 2024.
  • The staff interpreted recent inflation data indicating that supply constraints were putting a larger amount of upward pressure on
    prices than previously anticipated.
  • The staff continued to judge that the risks to the baseline projection for economic activity were skewed to the downside.
  • Retail industries were also facing various bottlenecks, including those stemming from port congestion and delays in ground transportation. Participants noted that their District contacts generally did not expect these bottlenecks to be fully resolved until sometime next year or even later.
  • Participants noted that, in keeping with the outcome-based standard for initiating a tapering of asset purchases, the Committee could adjust the pace of the moderation of its purchases if economic developments were to differ substantially from what they expected.
  • Several participants indicated that they preferred to proceed with a more rapid moderation of purchases than described in the illustrative examples.
  • Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December.

Read here the entire statement of the Fed Minutes

Fed Members Have a Big Challenge at Their Next Meeting

Also, several Fed members expressed concern that the high degree of accommodation being provided by monetary policy, including through continued asset purchases, could increase risks to financial stability.

The next Fed meeting is November 2-3. All investors should follow very closely what happens here, as it will affect the stock markets and the dollar. Starting the tapering process in November is on the hawkish side of market expectations.

St. Louis Fed President James Bullard told CNBC on Tuesday that he thinks tapering should be more aggressive in case the Fed needs to rate interest rates next year to combat persistent inflation.

Likewise, Inflation pressures have continued, though, with a reading Wednesday showing that consumer prices are up 5.4% over the past year, the fastest pace in decades.

The truth of the matter is that the Fed does not have an easy path to making good decisions at its next meeting.

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