Goldman's FOMC Post-Mortem: "Tapering Likely In September"
While we found it modestly comedic (and certainly ironic) that CNBC's crack team celebrated the recovery from the initial knee-jerk drop in stocks after the FOMC by top-ticking that suspension of reality; we suspect the following post-mortem from Goldman on the minutes is what confirmed concerns across the street... "Minutes from the July 30-31 FOMC meeting were generally consistent with our view that tapering of asset purchases is likely to occur at the September meeting, coincident with an enhancement of the forward guidance."
Via Goldman Sachs' Jan Hatzius,
BOTTOM LINE: Minutes from the July 30-31 FOMC meeting were generally consistent with our view that tapering of asset purchases is likely to occur at the September meeting, coincident with an enhancement of the forward guidance.
1. Regarding discussion of asset purchases, while nearly all Committee members agreed that a change in the pace of asset purchases was not yet appropriate at the July meeting, the forward-looking description of where members stood was less clear. "A few" members emphasized the possibility of being patient while "a few others" thought that it would soon be appropriate to slow the pace of purchases. Elsewhere, "a number" of participants (including non-voting Presidents) noted that "market expectations of the future course of monetary policy, both with regard to asset purchases and with regard to the path of the federal funds rate, appeared well aligned with their own expectations," at least as of late July. Overall, we think this information is consistent with September tapering, but this is by no means certain.
2. In addition, there was a discussion of whether additional information on the Committee's outlook for asset purchases?which the minutes noted would reaffirm Chairman Bernanke's remarks on this topic at the last post-FOMC press conference?should be added to the policy statement. There appeared to be broad support for explicitly adding this information to the statement in the future.
3. The minutes revealed fairly extensive discussion of forward guidance at the meeting, with "several" participants willing to contemplate lowering the unemployment threshold if "additional accommodation were to become necessary or if the Committee wanted to adjust the mix of policy tools." Chairman Bernanke has strongly suggested that the Committee is interested in adjusting the mix of tools in recent public remarks. "A number" of participants also suggested providing "additional information on the Committee's intentions regarding adjustments to the federal funds rate after the 6 1/2% threshold was reached, in order to strengthen or clarify the forward guidance." (Emphasis added.) We see these remarks as consistent with the Committee enhancing the forward guidance at the September meeting.
4. The economic assessment expressed in the minutes was generally a bit more pessimistic, with the staff noting that growth in the first half was weaker than expected. "A number" of participants were less confident about a near-term pickup in growth due to higher mortgage rates, higher oil prices, slow global growth, and continued fiscal worries. In addition, overall labor market conditions were described by participants as remaining "weak."
5. There was a special presentation on long-run planning for monetary policy implementation, which included a briefing on potentially establishing a "fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market rates." Because the minutes note that "a wide range of market participants" could be eligible to participate, this facility would presumably be intended to address the fact that not all fed funds market participants are eligible to earn interest on excess reserves, and so interest on excess reserves has not acted as a floor on the fed funds rate as it should in theory.
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