Statements stemming from members of the U.S. Federal Reserve indicate that the central bank could taper monetary easing policy this year. Since then, the U.S. stock market has faltered on “Fed fears,” despite “some” members of the Federal Open Market Committee (FOMC) indicating they wanted to wait until 2022.
Fed’s July Minutes Show FOMC Members Are Leaning Toward Tapering Back Bond Purchases
Wall Street is not having a great end of the week due to the recently published FOMC meeting minutes report. According to the July minutes statements, the Fed could start pulling back quantitative easing (QE) tactics like the monthly bond purchases.
The Fed had noted in past statements that the central bank would start with bond purchase tapering before it started to curb mortgage-backed security (MBS) purchases. The participants looked at the U.S. economy and its evolution since the start of QE tactics.
“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,” the minutes report stresses.
“In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook,” the minutes report further notes. “The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals.” The Federal Open Market Committee report adds:
The committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Fed Will Likely Taper Before Raising Rates, Skeptics Believe Taper Talk Is Meaningless
On many occasions, many Federal Reserve members have noted that tapering back QE will likely happen first before the central bank looks to hike benchmark interest rates. While touching upon the subject in the announcement, the FOMC minutes note that it needed to “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.”
After the minutes were published, major indexes like NYSE and the Dow Jones started to dive. The Federal Reserve has been purchasing $120 billion per month in bond purchases and that does not include MBS purchasing.
Meanwhile, Northmantrader.com’s Sven Henrich criticized the Fed and markets after the minutes report was released. Name one 20% or larger drop in markets since the March 2009 lows the Fed has not reacted to with either new intervention or a policy pivot. You can’t because it doesn’t exist,” Henrich said. The financial analyst added:
One 10% correction and there won’t be a taper. One 20% correction and there will be more QE.
Of course, Peter Schiff, the gold bug and American economist had to throw in his two cents about the tapering announcement and why he believes the Federal Reserve won’t raise interest rates.
“There’s no excuse for 0% interest rates,” Schiff tweeted on Thursday. “But the Fed won’t raise rates now as doing so would create another financial crisis. But the longer the Fed waits, the worse the crisis will be. So if the Fed won’t raise rates now, it never will. Only a dollar crisis will force its hand.”
Schiff said that if the Fed decides to taper QE it won’t be for too long. “Even if they do taper, it will be minor and won’t last long, as the Fed will quickly reverse course and ramp up QE above the current level,” Schiff said on Thursday.
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