FOMC Minutes Confirm That “Tapering” Is Closer Than Expected

- Christophe Barraud


Last night, the FOMC published Minutes from October meeting. Even they did not provide specific insight into the timing of an initial tapering move, they suggested that (1) “tapering” will start in coming months even before an unambiguous further improvement in the outlook was apparent”, (2) Fed members considers equal cuts to MBS and Treasury Purchases, (3) Fed has yet to determine the best way to help further distinguish between tapering and tightening.


We could isolate some excerpts from the FOMC Minutes:


Participants reviewed issues specific to the Committee’s asset purchase program. They generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months. However, participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent. A couple of participants thought it premature to focus on this latter eventuality, observing that the purchase program had been effective and that more time was needed to assess the outlook for the labor market and inflation; moreover, international comparisons suggested that the Federal Reserve’s balance sheet retained ample capacity relative to the scale of the U.S. economy.

A number of participants believed that making roughly equal adjustments to purchases of Treasury securities and MBS would be appropriate and relatively straightforward to communicate to the public. However, some others indicated that they could back trimming the pace of Treasury purchases more rapidly than those of MBS, perhaps to signal an intention to support mortgage markets, and one participant thought that trimming MBS first would reduce the potential for distortions in credit allocation.


Participants discussed the financial market response to the Committee’s decisions at its June and September meetings and, more generally, the complexities associated with communications about the Committee’s current policy tools. A number of participants noted that recent movements in interest rates and other indicators suggested that financial markets viewed the Committee’s tools–asset purchases and forward guidance regarding the federal funds rate–as closely linked. One possible explanation for this view was an inference on the part of investors that a change in asset purchases reflected a change in the Committee’s outlook for the economy, which would be associated with adjustments in both the purchase program and the expected path of policy rates; another was a perspective that a change in asset purchases would be read as providing information about the willingness of the Committee to pursue its economic objectives with both tools.


Since the last FOMC meeting, several figures have showed that growth will be stronger than expected in H2 2013. Moreover, PCE inflation rebounded in Q3 and the October employment report was very strong. As a consequence, if the incoming data confirm the recent improvement and the Congressional budget committee finds a comprise concerning fiscal issues by Dec. 13, the Fed could decide to taper before the end of the year which is sooner than expected (March 2013).


Regarding the constitution of asset purchases, I think that people were surprised to read that the Fed could reduce both its Treasuries and MBS’ purchases in the same time. The fact is that MBS market is less liquid and impacts directly mortgage rates.