FOMC Minutes: Green light for QE tapering – UOB

UOB Group’s Head of Research Suan Teck Kin, CFA, comments on the recently published FOMC Minutes of the September 21-22 meeting.

Key Takeaways

“In the 21-22 Sep FOMC minutes… policymakers at the US Federal Reserve (Fed) indicated the central bank could begin tapering its US$120 bn monthly bond purchase program starting from mid-Nov or mid-Dec. The minutes read that participants noted that ‘if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December’.”

“The minutes noted that committee members commented on the “illustrative path” developed by the Fed staff on the tapering process as a “straightforward and appropriate” template that policymakers might follow. Some participants said that giving advance notice to the public may reduce the risk of an “adverse market reaction” to the tapering process. The path featured monthly reductions in the pace of asset purchases by US$10 bn of US Treasury and US$5 bn of agency mortgage-backed securities (MBS). Several participants though noted that they preferred to proceed with “a more rapid moderation” of purchases than described in the illustrative examples.” 

“While noting that labor market conditions had continued to improve in recent months, participants also expected the labor market to continue to improve in coming months.”

“On inflation, participants acknowledged that inflation rate was “elevated” and they expected it would “likely remain so in coming months before moderating”, although it reflected largely “transitory” factors.”

“The latest FOMC minutes essentially reaffirm the view that the tapering process is set to begin from Nov 2021, and complete in about 8 months’ time, as laid out in our earlier report, so as to allow for greater policy flexibility for the Fed should there be a need to hike the Fed funds interest rates earlier than our projected “lift off” in Dec 2022.”

“By the end of the tapering in July 2022, we are projecting one 25bps hike of the Fed funds rate to 0.25-0.50% at end-2022, followed by two more 25bps hikes in 2023.”