The FOMC Minutes Revealed – Tapering in 2013 is Still on the Table

The minutes of the recent FOMC meeting were came out today. The minutes revealed that several members thought it was high time to taper QE3 back in the September meeting. In the end, all members sans one decided to maintain the current monetary policy unchanged. Nonetheless, the possibility of the Fed tapering QE3 this year is still on the table.

In the September FOMC meeting, the Fed decided, much to the surprise of many market analysts, not the taper the asset purchase program at this stage. The main concerns were with respect to the risk surrounding the fiscal policy, i.e. the budget talks, which latter resulted in the current government shutdown. The mixed signal that came up from the latest economic data has also leaned the Fed towards maintaining its current policy before cutting down QE3. 

“… the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy. As a result of such concerns, a number of participants thought that risk-management considerations called for a cautious approach and that, in light of the ambiguous cast of recent readings on the economy, it would be prudent to await further evidence of progress before reducing the pace of asset purchases.” 

On the other side, several members it’s high time to start tapering QE3, their main concerns revolved around the credibility of the Fed, and how this non-decision reflects on the Fed’s outlook of the U.S economy.

“…concerns were expressed that a delay could potentially undermine the credibility or predictability of monetary policy by, for example, increasing uncertainty about the Committee’s reaction function and about its commitment to the forward guidance for the federal funds rate, with the result of an increase in volatility in financial markets. Moreover, maintaining the pace of purchases could be perceived as a sign that the FOMC had turned more pessimistic about the economic outlook.”

Another factor to consider, which also rose in the minutes, is how the decision to taper QE3 will be perceived with respect to the interest rate. Tapering QE3 could signal for many that this will result in the Fed raising the interest rate in the near future. This sentiment, however, the Fed will try to avoid.  Such concern is likely to also affect the upcoming FOMC decisions.

I still think the Fed will hold its ground and maintain its current policy in the coming months. At the very least, the current government shutdown is likely to keep the Fed making any changes in the upcoming FOMC meeting at the end of October.

In the meantime, the financial markets seem to have reacted to this publication as the prices of gold and silver tumbled down, while the USD rose against the Euro and Canadian dollar.

The recent news regarding the Fed is that President Obama has nominated Janet Yellen to be Ben Bernanke’s successor as Chairman of the FOMC. This news seems to have had little impact, so far, on the markets. Yellen is considered Dovish and close to Bernanke in this regard. Her nomination will still have to pass Congress but it’s likely to pass.


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