Snap analysis, courtesy of Newsquawk:
Dovish Fed minutes note 'substantial further progress' not yet been made, but most see conditions being met later this year
- The FOMC July meeting minutes provided dovish offset from some of the hawkish Fedspeak that has been heard recently.
- The minutes suggested that participants generally judge that the standard of "substantial further progress" had not yet been met, particularly with respect to labor market conditions, and that risks to the economic outlook remained, although most judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee's "substantial further progress" criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal -- all dependent on progress towards the Fed's goals.
- There are still several participants that indicated that a taper was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee's "substantial further progress" standard or because of uncertainty about the degree of progress toward the price-stability goal.
- It is noteworthy that the minutes from the meeting, which was framed by market participants as hawkish, is being interpreted as dovish, particularly since the Committee will not have seen the downside surprises in recent economic data metrics, which suggest some weakening economic momentum.
- The minutes do not do much to alter the narrative that the taper will still be announced in Q4. Several noted that an earlier start to tapering could be accompanied by more gradual reductions in the purchase pace and that such a combination could mitigate the risk of an excessive tightening in financial conditions in response to a tapering announcement.
- There was no explicit hint about how long the Fed sees the taper process lasting, although there was an allusion to policy being set based on how the economy progresses.
- In terms of the sequencing between tapering and asset purchases, participants indicated that the standards for raising the target range for the federal funds rate were distinct from those associated with tapering asset purchases, and remarked that the timing of those actions would depend on the course of the economy, and many noted that, when a reduction in the pace of asset purchases became appropriate, it would be important that the Committee clearly reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate.
- The debate on whether to taper mortgage-backed securities faster or earlier than Treasuries seems to be over, and the FOMC seems inclined to instead reduce them proportionally at the same rate. "Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally in order to end both sets of purchases at the same time.”
- As a reminder, the FOMC took place before payrolls, crash in consumer sentiment and retail sales miss
Since The Fed's last statement (and press conference) on July 28th, markets have gone approximately nowhere with stocks, bonds, and the dollar very marginally higher and gold marginally lower...
While at the same time, the market has shifted notably more hawkish as taper talk has escalated...
And on a side note, bets on The Fed actually cutting rates further also surged post-FOMC...
As we noted earlier, all eyes will be on the Minutes to see if they went into any more detail on timeframes and methodology for tapering its massive $120 billion per month bond-buying scheme (do “some” or “many” want to get going at year-end, or earlier?)... and just how scared they are of Delta (which Fed's Bullard said today "would not derail the recovery")... and just how much they breally believe that inflation will be transitory. As a reminder, The Jackson Hole Economic Symposium will take place 26-28th August and many suspect hints of the taper will be offered there, which some suspect means today's Minutes will lay more groundwork for that narrative shift.
As expected, Fed officials ramped up deliberations last month over how and when to start pulling back their extraordinary support for an economy growing more rapidly than they expected earlier this year.
On Substantial further progress...
“Most participants judged that the Committee’s standard of ‘substantial further progress’ toward the maximum-employment goal had not yet been met,” the minutes said.
“At the same time, most participants remarked that this standard had been achieved with respect to the price stability goal.”
On the Taper...
Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal.
Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s “substantial further progress” standard or because of uncertainty about the degree of progress toward the price-stability goal. Participants agreed that the Committee would provide advance notice before making changes to its balance sheet policy
On pace of tapering...
Participants expressed a range of views on the appropriate pace of tapering asset purchases once economic conditions satisfied the criterion laid out in the Committee's guidance. Many participants saw potential benefits in a pace of tapering that would end net asset purchases before the conditions currently specified in the Committee's forward guidance on the federal funds rate were likely to be met.
On tapering mix (TSY vs MBS),,,
Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally in order to end both sets of purchases at the same time.
On the outcome of the taper...
Many participants remarked upon risk-management considerations when contemplating how and when to make changes to the Committee’s pace of asset purchases.
On premature tapering and how the market could react...
A few participants suggested that the Committee would need to be mindful of the risk that a tapering announcement that was perceived to be premature could bring into question the Committee's commitment to its new monetary policy framework
Some participants suggested that it would be prudent for the Committee to prepare for starting to reduce its pace of asset purchases relatively soon, in light of the risk that the recent high inflation readings could prove to be more persistent than they had anticipated and because an earlier start to reducing asset purchases would most likely enable additions to securities holdings to be concluded before the Committee judged it appropriate to raise the federal funds rate.
On fears of a bubble...
A few participants expressed concerns that maintaining highly accommodative financial conditions might contribute to a further buildup in risk to the financial system that could impede the attainment of the Committee’s dual-mandate goals.
Several participants saw benefits to reducing the pace of these purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets. Several other participants, however, commented that reducing the pace of Treasury and MBS purchases commensurately was preferable because this approach would be well aligned with the Committee’s previous communications or because purchases of Treasury securities and MBS both provide accommodation through their influence on broader financial conditions.”
On Delta fears (and reversing taper)...
With respect to the effects of the pandemic, several participants indicated that they would adjust their views on the appropriate path of asset purchases if the economic effects of new strains of the virus turned out to be notably worse than currently anticipated and significantly hindered progress toward the Committee’s goals
Full Minutes below: