The word “variant” showed up seven times in the July Fed minutes, the word “Delta” a half-dozen.
Clearly, “the strain,” as it were, is beginning to factor into monetary policymaking.
The staff review noted that fluctuations in markets between the June and July FOMC meetings were attributable to the hawkish turn as conveyed in the June dots and inflation projections, but also to “increased concerns about the rapid spread” of Delta. “Rapid” indeed (figure below).
While “a few participants” expressed caution about the “buildup of risk” associated with the continuation of “highly accommodative financial conditions,” the minutes juxtaposed that with concerns expressed by “a few other participants,” who said “preparations for reducing the pace of asset purchases should encompass the possibility that the reductions might not occur for some time and highlighted the risks that rising COVID-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school and so damp the economic recovery.”
In other words, if the question was whether the Delta variant is now part of the taper discussion, the answer is “yes.”
On the logistics of tightening, some participants were keen to emphasize that the threshold for liftoff is different from the standard for paring monthly bond-buying. “The standards for raising the target range for the federal funds rate were distinct from those associated with tapering asset purchases,” some policymakers said, noting that “the timing of those actions would depend on the course of the economy.” Several participants said starting the taper earlier “could be accompanied by more gradual reductions in the purchase pace.” That echoed recent rhetoric from Robert Kaplan, among others. Starting earlier but proceeding slower “could mitigate the risk of an excessive tightening in financial conditions in response to a tapering announcement,” several participants said.
All of that seemed to skew dovish, but interpreting these tea leaves in real time is always a fool’s errand.
I would note, though, that the language emphasized the necessity of ensuring markets don’t get the “wrong” idea when it comes to drawing conclusions about the timing of the first rate hike based on the taper timeline. For instance, the minutes said that, “Many participants noted that, when a reduction in the pace of asset purchases became appropriate, it would be important that the Committee clearly 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.”
I’m compelled to roll out old faithful (figure below).
The visual is obligatory whenever the taper comes up, tired and clichéd though it most assuredly is.
As far as the composition of the taper, the appetite for tapering MBS purchases faster appears to have dissipated materially. “Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally in order to end both sets of purchases at the same time,” the minutes said.
The word “inflation” was mentioned 81 times. “A few participants noted that the transitory nature of this year’s rise in inflation, as well as the recent declines in longer-term yields and in market-based measures of inflation compensation, cast doubt on the degree of progress that had been made toward the price-stability goal since December,” one key passage said. The next line might spook markets — at the margins anyway. To wit:
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 because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal.
That pretty clearly suggests that if the August jobs report is any semblance of robust, September is squarely in play for a taper announcement.
For what it’s worth, 84% of respondents to BofA’s most recent Global Fund Manager survey expect an unveil by year-end (figure below).
There were plenty of caveats. Although “various participants commented that economic and financial conditions would likely warrant a reduction in coming months,” the account of the meeting said that “several others indicated that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s ‘substantial further progress’ standard or because of uncertainty about the degree of progress toward the price-stability goal.”
One rates strategist called it “a classic ‘several’ versus ‘most’ dynamic.”
Whatever the case, there were plenty of nods and allusions to the necessity of giving the market plenty of “advance notice.” And while this might seem far-fetched right now, it’s worth noting that the best laid plans can go awry literally overnight.
An RBNZ rate hike was a foregone conclusion as late as Monday evening. 48 hours and one nationwide lockdown later, policymakers nixed it. New Zealand had 10 new cases this week. The US had ~128,000 infections on Tuesday.
If and when this is all in the rear view mirror, our country will have wished the US Treasury had issued longer term bonds – maybe that was not in the cards, but it feels “unstable” with so much short term debt.