June’s Federal Reserve meeting minutes shows policymakers haven’t decided yet when to start tapering quantitative easing. Since agreeing in December 2020, to buy USD120 billion each month of bonds, officials have said the US economy needs to make ‘substantial further progress’ towards meeting the Fed’s goals of maximum employment and stable 2% inflation before the pace of asset purchases can be cut.
June’s minutes noted ‘the committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue.’
But the minutes showed officials are divided on when they can start curbing the Fed’s bond buying. Arguing for early tapering: ‘various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings.’ In contrast, Fed doves ‘saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation. As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases.’
We expect the Fed will be slow to taper.
Source: Bank of Singapore, Bloomberg.
Officials are likely to discuss the pace of asset purchases again at July’s Fed meeting before signaling in September the economy has made enough progress for policymakers to firm up their plans for when to start tapering the central bank’s USD120 billion a month of bond buying.
Even then - despite having given financial markets ample warning to avoid a repeat of the 2013 taper tantrum - the Fed is still likely to wait until December before announcing it will begin reducing asset purchases only in January 2022.
Moreover, the central bank may only cut its pace of bond buying by USD10 billion each month during 2022. Thus, the central bank’s tapering will be gradual and take all of next year to finish. The chart above shows the Fed took a similar patient approach when it slowed down its third and final round of quantitative easing (QE3) after the 2008 financial crisis in 2013 and finished its bond buying altogether in 2014.
The Fed’s likely slow exit from its current round of quantitative easing would keep financial conditions loose and support America’s recovery from the pandemic. It would also push back expectations of the central bank’s first interest rate hikes to at least 2023 as the Fed would first finish its quantitative easing before considering increasing its fed funds rate. Thus, we expect gradual tapering starting only in 2022 will result in the Fed’s dovish policies continuing to benefit risk assets in 2021.Disclaimer applicable to recommendation
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