Fed Officials Signal Continued Support, No Rush to Taper

08 Jul 2021 · 3rd Party Analysis

Fed Officials Signal Continued Support, No Rush to Taper

WRITTEN BY ThorFX

In Summary

  • The US Federal Reserve decided to continue its monetary support, shrugging off inflation worries
  • FOMC members emphasized patience in assessing progress toward its goals before announcing any changes to its asset purchase scheme

Federal Reserve officials talked about the need for patience when it comes to tapering asset purchases. At the most recent meeting of the Federal Open Market Committee, central bankers reiterated their commitment to sticking to current monetary policies that have been buoying the stock market for over a year. The continued supportive stimulus of $120bn a month, according to the June 15-16 meeting summary, will not be altered any time soon, at least until enough time has been given so the market could prepare accordingly.

Market participants expected to get a glimpse into talks about when the US central bank planned to begin reducing its bond-buying program. Instead, the meeting minutes provided only a few insights that weren’t previously known.

Some committee members highlighted that there are increased risks of causing the economy to overheat by the consistent monetary injections. Easy-money policies, according to several of the 18 policymakers, could fuel an outsized rise in inflation, and to prevent that, the Fed needed to lean against the economy and scale back its asset purchases along with raising the interest rates

Policy Makers Emphasize Caution

“Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data,” the minutes said.

The prevailing mindset among the central bankers was that there should be no rush to taper at the current stage of the economic cycle. The Committee’s standard of “substantial further progress” is still to be met as both of Fed’s goals, maximum employment, and stable prices, are still out of reach.

“Incoming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases,” the readout stated. “In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.”

While Fed officials decided to keep interest rates close to zero, they generally agreed to perform the first post-pandemic rate hike by 2023. Out of 18 officials, 13 projected they would raise rates by 2023, with most expecting to increase the main rate by 0.5%. Seven members of the committee expected to raise rates at some point in 2022.

On the looming topic of inflation, the committee projected the current inflationary pressures to subside next year. While the Fed acknowledged the faster progress of the economic recovery has led to prices rising faster than planned, the committee generally viewed inflation as reflected “transitory factors.”

Wall Street showed little reaction to the readout. Stocks remained calm and to the upside, signaling investors’ confidence in the Fed’s approach to the economy. The S&P500 and the Nasdaq Composite added moderate gains to their valuations. The slight climb was sufficient for both stock benchmarks to settle at fresh records. The Dow also turned higher on the day, while the US dollar traded sideways.

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