Forex News – Fed meeting minutes point to more tapering
January 9, 2014 1:14 pm
The release of the minutes from the latest Federal Open Market Committee (FOMC) meeting on December 17/18 signaled that perhaps the market was underestimating the Fed’s willingness, if not to actually tighten soon, to reduce the amount of monetary stimulus.
During the meeting, certain Fed Governors noted that the benefit from additional asset purchases seemed to be outweighed by certain significant and rising costs. These costs, according to participants in the meeting, were risks to financial stability as this easy monetary policy could be encouraging excessive risk taking in the financial sector.
Although it’s unclear if the majority of participants actually shared this view, it is possible to interpret this stance that the Fed is becoming more worried about the possible negative aftereffects of QE on financial stability rather than rising inflation. It is also possible to connect financial stability concerns to rapidly rising asset prices rather than excessive lending, as credit growth has been subdued so far in this economic recovery.
The minutes also give some insight into whether a set program for unwinding QE would be published in order to remove uncertainty or whether the unemployment threshold for raising interest rates (6.5%) would be lowered, to say, 6%. In both cases, the committee decided – more prudently perhaps – to preserve flexibility by saying that tapering was not on a preset schedule and by saying that the rates would likely stay at zero even if unemployment fell below 6.5% – provided projected inflation was also below the 2% target.
Overall the message from the minutes was one that the market had known already; that tapering would continue as long as decent economic data continues to be released in the United States. What is perhaps new is that a number of Fed governors have acknowledged the dangers to financial stability from ultra-easy monetary policy and this challenges the traditional Fed view – expressed by Janet Yellen herself no less during her confirmation hearings – that there were no signs of bubble trouble (risks to financial stability).
Overall, the risk that the Fed could perhaps be more aggressive in reducing stimulus, has increased following the Fed minutes. It is worth keeping in mind that not only will a strong economy convince the Fed to taper faster, but there appear to be some concerns about financial stability. This overall could prove dollar positive and push US interest rates higher. The market has brought forward its expectation for an interest rate hike in the US for the second half of 2015.
The release of the minutes from the latest Federal Open Market Committee (FOMC) meeting on December 17/18 signaled that perhaps the market was underestimating the Fed’s willingness, if not to actually tighten soon, to reduce the amount of monetary stimulus.
During the meeting, certain Fed Governors noted that the benefit from additional asset purchases seemed to be outweighed by certain significant and rising costs. These costs, according to participants in the meeting, were risks to financial stability as this easy monetary policy could be encouraging excessive risk taking in the financial sector.
Although it’s unclear if the majority of participants actually shared this view, it is possible to interpret this stance that the Fed is becoming more worried about the possible negative aftereffects of QE on financial stability rather than rising inflation. It is also possible to connect financial stability concerns to rapidly rising asset prices rather than excessive lending, as credit growth has been subdued so far in this economic recovery.
The minutes also give some insight into whether a set program for unwinding QE would be published in order to remove uncertainty or whether the unemployment threshold for raising interest rates (6.5%) would be lowered, to say, 6%. In both cases, the committee decided – more prudently perhaps – to preserve flexibility by saying that tapering was not on a preset schedule and by saying that the rates would likely stay at zero even if unemployment fell below 6.5% – provided projected inflation was also below the 2% target.
Overall the message from the minutes was one that the market had known already; that tapering would continue as long as decent economic data continues to be released in the United States. What is perhaps new is that a number of Fed governors have acknowledged the dangers to financial stability from ultra-easy monetary policy and this challenges the traditional Fed view – expressed by Janet Yellen herself no less during her confirmation hearings – that there were no signs of bubble trouble (risks to financial stability).
Overall, the risk that the Fed could perhaps be more aggressive in reducing stimulus, has increased following the Fed minutes. It is worth keeping in mind that not only will a strong economy convince the Fed to taper faster, but there appear to be some concerns about financial stability. This overall could prove dollar positive and push US interest rates higher. The market has brought forward its expectation for an interest rate hike in the US for the second half of 2015.
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