Tag Archives: FOMC minutes

Watch out for this week’s minutes from the FOMC meeting

8 Jul

Since Bernanke’s suggestion that QE may be tapered sooner than markets expected, equities have fallen, bond yields have risen and many commodities, particularly metals, have fallen off a cliff.

What can we expect from the minutes?

The statement following the meeting on June 19th said: “Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

Markets read into this that the Fed was preparing to taper its QE program. The minutes might suggest markets were a little too eager to sell risk assets and that the committee may not be as confident about the recovery as it may have first appeared.

Last week’s statement by the new BOE Governor, Mark Carney, and Mario Draghi, the ECB’s president made clear that Central Bank policy will remain accomodative for a good while longer. The fact that both statements were made within two hours of each other provides clues that Central Banks believe co-ordinated action, with forward guidance, the first in the BoE’s history, is the most effective way to manage the market’s expectations.

If the minutes do indeeed suggest that tapering may not happen for a while longer, we could see another substantial rise in equity prices. Bond yields appear a little more resilient to recent policy statements which could suggest investors are beginning to hesitate to buy bonds on dips.

The outlook for bond returns has very likely now swung towards the bearish camp.



FOMC divided on when to end purchases

21 Feb

The minutes of the FOMC Jan 29-30 meeting show divided opinion on when to end asset purchases.

A ‘number’ of participants believe the costs of QE would materialize before the benefits, while ‘several’ participants argue that the risks of ending QE prematurely are very high.

End sooner?

The debate does raise important questions as an early scaling back of QE could materially affect a number of markets. Bond yields and mortgage rates are at or near historical lows, aiding businesses requiring financing and home owners who can refinance mortgages or purchase properties very cheaply. This ultimately helps drive a recovery in the housing market, a vital component to the health of the economy . Equity markets have also rallied significantly, boosting consumer confidence and sparking a revival in M&A, as seen recently by Mr Buffet’s recent acquisition of Heinz.

Maintain asset purchases until unemployment drops?

The ‘cost’ of QE, raised by a number of the committee, refers to the impact on future inflation that printing money is likely to have.

US inflation at 1.7%, at first, should not cause great concern. But the FOMC participants know how quickly expectations can change if central banks are seen to be irresponsible with regards to price stability, a significant objective of the Fed’s monetary policy.

It seems the Fed is stuck between a rock and a hard place and the debate will continue for some time yet. Participants will ultimately be forced to make the least worst decision.

Given Mr Bernanke’s lifelong focus on analysing the causes of the great depression, it would be a great surprise if the Fed did prematurely end asset purchases. QE, after all, is part of Mr Bernanke’s detailed and meticulous plan to ensure that we never return to the deflationary depression of the 30’s – Read here Bernanke’s 2002 speech.

His plan may well work, but at what cost?


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