July 7, 2021
By Howard Schneider
WASHINGTON (Reuters) – At its June policy meeting the Federal Reserve edged towards a debate over when and how to reduce its support for a U.S. economy healing from the coronavirus pandemic, and the release of the minutes later on Wednesday may provide insight on how fast that discussion is evolving amid an unexpectedly large jump in inflation.
The Federal Open Market Committee’s June 15-16 meeting saw the U.S. central bank shift towards a post-pandemic view of the world, dropping a longstanding reference to the coronavirus as a constraint on the economy and, in the words of Fed Chair Jerome Powell, “talking about talking about” when to shift monetary policy as well.
The start of that discussion, along with interest-rate projections showing higher borrowing costs as soon as 2023, has caused investors to anticipate that the Fed will move faster than expected to end its support for an economy still afflicted by high levels of unemployment and, now, rising inflation.
Long-term Treasury yields are near five-month lows, and the gap between those and shorter-term yields has been narrowing, a development often associated with skepticism about the outlook for longer-term economic growth.
In this case, Cornerstone Macro analyst Roberto Perli wrote recently, “the market views the perceived Fed shift as harmful to the long-term prospects for the U.S. economy,” with the Fed’s stated commitment to getting back to full employment seen as weakening in the face of higher-than-anticipated inflation.
The minutes, which are due to be released at 2 p.m. EDT (1800 GMT), may help clarify how urgent any fears about inflation or financial stability were felt at a meeting where policy was left on hold even as discussion opened over when to change it.
Powell, speaking to reporters after the end of last month’s policy meeting, said any increase in the Fed’s benchmark overnight interest rate from the current near-zero level remained far off. He said, however, that the Fed would begin a “meeting-by-meeting” assessment of when to start reducing its $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities, and of how to announce its plans for doing so.
The U.S. economy, he said, was still “a ways away” from the progress on job creation the Fed wants to see before reducing its asset-purchase program, which helps keep borrowing costs lower for families and firms and supports the recovery by making the purchase of homes, cars and similar items more affordable.
But “we’re making progress,” Powell said in the briefing, and to such an extent that he and his colleagues now needed to “clarify … thinking around the process of deciding whether and how to adjust the pace and composition of asset purchases.”
Graphic: The pandemic bond market – https://graphics.reuters.com/USA-FED/xegpbzboypq/chart.png
With the Fed still seemingly a step removed from an actual debate at that point, what investors are wondering, and what the minutes may begin to show, is how fast the discussion will spool out and when the actual “taper” may begin.
Several regional Fed policymakers have since said they felt the economy was near the point where the central bank should pull back. However, even some of them have indicated it will take several meetings to develop and announce a plan for reducing the bond purchases.
The Fed’s policy-setting committee meets eight times a year, with the next two meetings scheduled for July 27-28 and Sept. 21-22. In the interim, the central bank will hold its annual research conference in Jackson Hole, Wyoming, a setting that Fed chiefs have often used to signal policy changes.
The U.S. economy added 850,000 jobs in June. If that pace of hiring continues over the summer, it “could prompt the Committee to accelerate the tapering timeline” from an expected start in January to as soon as October, analysts from Nomura wrote last week.
Economists polled by Reuters expect the Fed to announce a strategy for tapering its asset purchases in August or September, with the first cut to its bond-buying program beginning early next year.
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)