Key takeaways from the minutes of the Sep-21 FOMC meet

In fact, some of the more hawkish members want to start the taper from November itself so that inflation can be reined in.

Oct 18, 2021 09:10 IST India Infoline News Service

The minutes of the FOMC meet held in late September were released in the middle of October. While the Fed statement did show a lot of confidence on the part of Jerome Powell about keeping rates low, the Fed minutes indicate that the FOMC is veering towards tapering as early as November this year. The minutes are released by the FOMC, 3 weeks after the actual Fed meeting.

Here are key takeaways from the FOMC minutes.

10 key takeaways from the Fed minutes of Sep-21 meeting

The gist of the minutes is that the Fed is a lot closer to tapering its bond purchases than at any time since the pandemic. In fact, some of the more hawkish members want to start the taper from November itself so that inflation can be reined in. Here are some key takeaways.
  1. It appears from the minutes that the Fed is moving towards an early tapering despite headwinds like the Covid-19 Delta variant and relatively disappointing jobs data. It looks like the FOMC may not wait much longer to start the tapering of bond purchases and it may happen in November itself.
  2. While the fall in unemployment was a major consideration for future rate hikes, it is not exactly a precondition for tapering of the bond buying program. What would really matter is that inflation has risen for longer and has stayed well above 2% for a considerable amount of time. The US September inflation came in at 5.4%.
  3. One key point was the reduction in the monthly treasury purchases by $10 billion from $80 billion to $70 billion. At the same time, the MBS buying will be reduced by $5 billion a month from $40 billion to $35 billion. In short, the overall bond buying will stand reduced from $120 billion to $105 billion and progressively each month.
  4. The reason the Fed would be still cautious is, it has observed that the jobs numbers were bad in August and actually worsened in September. It was partially due to the resurgence of cases but the bottom line is that there is still a huge gap between pre-COVID employment and the current situation.
  5. One of the key considerations responsible for the front-ending of the taper was that the supply chain considerations were taking longer than anticipated to sort out. To that extent, the supply chain constraints were anything but transitory and almost had a structural tinge to it. With the inflation almost 340 basis points above the cut-off level of 2%, the Fed may not have too many options other than front-ending the taper.
  6. In the FOMC statement, Powell noted that the “tapering may soon be warranted”. One interpretation would be that the taper would start once the debt ceiling issue is resolved. Now that the debt ceiling is out of the way, and the impact of Evergrande looks to be controlled, the Fed has a solid case for starting off with the taper.
  7. Inflation was 5.3% in Aug-21 and 5.4% in Sep-21. Even the core inflation is at 3.7%. However, millions of jobs are still missing compared to the pre-pandemic period. This has created a situation, where conditions are ripe for an early taper of the bond buying but any rate hikes may still be far away. The compromise solution could be front-ending of the taper, which is now expected towards the end of 2021.
  8. The big question before the Fed was whether “substantial further progress”, a favourite term of the Fed, had been reached on the economy. With the inflation above the Fed target for most of 2021, the pressure is mounting on the Fed. The inflation was an outcome of unbridled liquidity, not backed by adequate output. That must be regulated.
  9. One concern is that the 7-day moving average of COVID-19 cases has jumped from 16,000 in Jun-21 to 100,000 in Aug-21. That could derail any recovery if it gets out of control. Much of the liquidity was channelled to households to protect their purchasing power, so the Fed really has a tough task to juggle growth, inflation and jobs.
  10. Fed believes that high-frequency data still hints at reasonable growth and high inflation, notwithstanding jobs situation. Hence, Fed may announce the taper in its November 2-3 meeting. That would mean, the taper would officially commence from November itself. In fact, some of the members were even targeting to conclude the purchases by mid-2022, which would be feasible at the current rate of $15 billion per month.
Traders are already pricing in taper completing by mid-June 2022 and two possible rate hikes of 25 bps each in 2022. In fact, out of 18 forecasts, this time 9 expected at least one rate hike in 2022, compared to 7 in the last Fed meeting. The bottom line is that while the debate on rate hikes is still open, the consensus is that the taper should start in right earnest from Nov-21 itself.

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