From 'Tapering' to concluding asset-purchases, and from rate-hike-expectations to exit strategies (and what other indicators may be worth watching), BofAML previews the all-important release of the FOMC's last meeting minutes.
Via BofAML,
The release of the minutes from the June 18-19 meeting of the Federal Open Market Committee, the Fed’s policy-making arm, is likely to garner attention in the markets. Investors will be looking for indications of how soon the Fed will start to taper QE3, how quickly they will conclude asset purchases altogether, and when the first interest rate hike is likely to begin. We expect much discussion on the first point, as Fed Chairman Ben Bernanke was “deputized” by the Committee to discuss a 7% unemployment rate as “indicative” of a “substantial improvement” in labor market conditions during his June 19 post-FOMC press conference. We will look for comments on what other economic indicators, such as growth and inflation, as well as other labor market measures, would influence the timing of the first cut in the purchase pace.
We also expect a lively debate over what conditions would warrant the second and subsequent cuts, with an emphasis on the Fed potentially taking some time to fully wind down QE3. Any indication of the planned size of the reductions in the buying pace, or whether Treasury purchases would be cut more or less than MBS purchases, would be notable. Keep in mind the difference between “participants” (all 19 Fed officials on the FOMC) and “members” (the 12 voters) when assessing support for changing the QE3 purchase pace.
Further debate over the exit strategy would be notable as well. The market had pulled forward the timing of the first rate hike into late 2014, which the minutes are likely to show is earlier than most Fed officials currently think is appropriate.
Comments about whether the Fed will wait until well after the unemployment rate hits 6.5% before the first rate hike, whether the inflation rate must rise to a certain level to consider rate hikes, and potential changes in the Fed’s forward guidance thresholds, all would get attention. Additional discussion may occur over subsequent steps in the exit strategy, including how to implement an interest rate target in the face of a very large amount of excess reserves. We already know from Chairman Bernanke that the majority of the FOMC plans to hold MBS to maturity instead of selling; any additional clarifications to the June 2011 Exit Strategy Principles would be noteworthy.