Federal Reserve officials discussed a throttle at their last meeting, but according to the minutes released Wednesday, few seemed in a hurry to get the process off the ground.
The summary of the meeting of the Federal Open Market Committee on March 15-16 June just gave some fresh insight into talks about when the central bank should start slowing the pace of its bond purchases.
Some members said the economic recovery is progressing faster than expected and is accompanied by an oversized spike in inflation, both of which argue in favor of taking the Fed off the policy pedal.
However, the prevailing mindset was that there should be no rush and that the markets must be well prepared for change. According to the minutes, most members agreed that the economy has not yet reached the benchmark set by the Fed for “significant further progress” in major policy change.
“In the upcoming meetings, participants agreed to further evaluate the progress of the economy towards the committee’s objectives and to begin discussing their plans to adjust the path and composition of asset purchases,” the minutes read. “Participants also confirmed their intention to cancel well in advance of an announcement in order to reduce the pace of buying.”
While the document noted that some officials felt the conditions needed to be met “a little earlier than expected,” others said the FOMC “should be patient in evaluating progress toward its goals and making changes to its plans for the purchase of assets to be disclosed “.
Markets barely reacted, stocks rose and government bond yields fell.
“The minutes of the Fed’s FOMC meeting in mid-June were not as restrictive as we suspected,” wrote Paul Ashworth, US chief economist at Capital Economics. “In particular, there appears to be limited support for reducing monthly asset purchases anytime soon.”
At the meeting, the committee kept short-term rates close to zero but also indicated that it may adjust policies differently in the coming months.
The Federal Reserve’s monetary policy group kept its key interest rate anchored in a range between 0% and 0.25%. That was in line with market expectations.
But at his post-meeting press conference, Chairman Jerome Powell noted that committee members had their first discussions on slowing the pace of the central bank’s bond purchases each month. As of now, the Fed is buying at least $ 80 billion in government bonds and $ 40 billion in mortgage-backed securities.
In the weeks since the meeting, several officials said it was time to work out a process for scaling back and eventually eliminating these purchases – “tapering” in Fed parlance.
The session summary should provide additional guidance on when committee members are considering when to begin tapering.
However, the protocol contributed little to the public dialogue about the pace of security purchases, essentially suggesting that officials “spoke of a cut”, reflecting a popular language of the market, but with little other progress. Some members discussed the possibility of reducing mortgage purchases in front of the Treasury, but nothing was decided.
Not only did Fed members keep interest rates in check and not announce any major cuts, they also revised their forecasts for economic growth and inflation upwards.
The prevailing sentiment, however, was that inflationary pressures would ease in the coming months, but not before a 3.4% surge this year.
These upward projections helped Fed officials advance their initial expectation for rate hikes through 2023, even though market prices now indicate at least one hike in 2022.
Members also discussed recent developments in the short-term finance markets, particularly repo transactions where banks swap high-quality collateral such as government bonds for reserves. Business has seen record demand over the past few weeks and Fed officials have generally expressed their support for a standing repo facility as a backstop to ensure market operations run smoothly.
At the meeting, the FOMC approved an increase of 5 basis points for the interest banks, which pay on excess reserves, as well as for overnight repo transactions.
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