Investors know Federal Reserve officials have started discussing plans to taper monthly bond purchases. Minutes from their most recent meeting may show just how splintered the debate stands.
Minutes from the July 27-28 meeting of the Federal Open Market Committee—the central bank’s rate-setting arm—are set to be released at 2 p.m. Eastern time Wednesday. They come out of a meeting where officials updated their policy statement to acknowledge ongoing strength in economic activity and the job market, as well as rising inflation. Officials caveated the optimism, however, with nods to persistent weakness in pandemic-struck sectors and reiterated the consensus view that price increases reflect transitory factors.
The official message: It’s time to talk about tapering, but it’s too soon to do it.
The FOMC in July reiterated that it would continue to buy $120 billion a month in Treasuries and mortgage-backed securities, and it added new language that reinforced expectations that tapering may start in the fourth quarter. The purchase program will remain in place ”until substantial further progress has been made toward its maximum employment and price stability goals,” the Fed repeated after its last meeting, adding: “the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”
Behind the scenes, there are opposing views. “The uniquely uneven economic recovery has led to a splintering within the FOMC,” says Kathy Bostjancic, economist at Oxford Economics. The hawks argue that the Fed should start tapering this fall in order to provide leeway to more quickly raise interest rates if inflation doesn’t turn out to be transitory, while the dovish members want to wait for greater clarity around the pace of inflation and the state of the supply-constrained labor market, she says.
In the weeks since the July meeting concluded, investors have heard from several Fed officials. The picture shaping up is that a growing cadre of officials want to start tapering sooner than later, pointing to bubbling inflation and a relentless rise in home prices. Dallas Fed President Kaplan, the first to say tapering should begin soon, has expressed particular concern over the program’s impact on the housing market. Others in the time-to-taper camp include Boston Fed President Eric Rosengren, St. Louis Fed President James Bullard and Fed governor Christopher Waller, though those so-called hawks disagree about speed (Kaplan wants an 8-month wind-down, for example, while Bullard sees a 5-month runway).
The key to handicapping taper timing, heading into the July meeting minutes and looking ahead to the Fed’s annual Jackson Hole symposium at the end of August, is where Fed leadership stands. Some of the loudest on tapering aren’t currently voting members, as regional Fed presidents rotate on and off the FOMC. Fed Chairman Jerome Powell’s vote is the most important one, and he’s been clear about where he stands.
“We’re not at substantial further progress,” Powell told reporters during his July press conference. “There’s a range of views on what timing will be appropriate. And those views ultimately track back to people’s views about the economy and what will happen as we make progress towards our goal.”
The upshot for investors, at least for now? The scale is still tipped toward tapering later than sooner.
“While it might appear that we’re leaning toward a September announcement, in fact the Delta variant has weighed so heavily on August’s sentiment data we suspect that offsets any urgency on the part of the Fed,” Lyngen says, referring to the steep drop in consumer confidence reported by the University of Michigan last Friday.
It isn’t to say that an official tapering announcement in September versus November or December represents a distinction without a difference, Lyngen adds. “After all, the assumption is that the sooner asset purchases are curtailed, the more quickly the Fed can hike rates if inflation dictates.”