Minutes of Fed meeting may provide clues on bond reduction schedule and inflation outlook Reuters

Howard Schneider

Washington (Reuters)-At the June policy meeting, the Fed began a debate on when and how to reduce support for the U.S. economy to recover from the coronavirus pandemic. The minutes of the meeting released later on Wednesday may provide relevant information. The idea of ​​how fast this discussion is evolving in a situation where inflation has risen unexpectedly sharply.

The meeting of the Federal Open Market Committee on June 15-16 witnessed the U.S. central bank’s shift to a post-pandemic worldview and no longer see the coronavirus as a long-term economic restriction. In the words of Federal Reserve Chairman Jerome Powell, “Talk about The same goes for talking about when to switch to monetary policy.

The beginning of the discussion and interest rate forecasts show that borrowing costs will rise in 2023 at the earliest, which makes investors expect the Fed to act faster than expected to end support for the economy that is still plagued by high unemployment, and now , Inflation rises.

Long-term Treasury yields are close to a five-month low, and the gap with short-term yields has been narrowing. This development is usually related to doubts about long-term economic growth prospects.

In this case, Cornerstone Macro analyst Roberto Perli recently wrote that “the market believes that the Fed’s transformation is harmful to the long-term prospects of the U.S. economy.” The Fed’s stated commitment to restore full employment is seen as weakening the face of higher-than-expected inflation. .

The minutes of the meeting will be released at 2pm Eastern Time (1800 GMT) and may help clarify how urgent concerns about inflation or financial stability are at the policy-shelved meeting, despite discussing when to change it.

Powell told reporters after the end of the policy meeting last month that the Fed’s benchmark overnight interest rate increase from the current level of close to zero is still far away. However, he said that the Fed will begin a “meeting-by-meeting” assessment of when it will begin to reduce its monthly purchases of US$120 billion in U.S. Treasury bonds and mortgage-backed securities, and how to announce plans to do so.

He said that the U.S. economy is “a long way from the progress in job creation that the Fed hopes to see before reducing its asset purchase program,” which will help reduce the cost of borrowing for households and businesses, and by making the purchase of houses, Cars and similar items are more affordable.

But “we are making progress,” Powell said in the briefing, and he and his colleagues now need to “clarify…think about the process of deciding whether and how to adjust the pace and composition of asset procurement.”

Chart: Pandemic Bond Market-https://graphics.reuters.com/USA-FED/xegpbzboypq/chart.png

Tapering schedule

Since the Fed seemed to be one step away from the actual debate at the time, what investors wanted to know was what the minutes of the meeting might begin to show, how quickly the discussion would end, and when the real “cutting down” would begin.

Since then, several regional Fed policymakers have stated that they believe the economy is close to the point where the central bank should retreat. However, even some of them said that it would take several meetings to formulate and announce plans to reduce bond purchases.

The Federal Reserve Policy Committee meets eight times a year, and the next two meetings are scheduled for July 27-28 and September 21-22. During this period, the Fed will hold its annual research conference in Jackson Hole, Wyoming, and the Fed chairman often uses this environment to express policy changes.

The U.S. economy added 850,000 jobs in June. Nomura Securities analysts wrote last week that if this rate of recruitment continues throughout the summer, it “may prompt the committee to speed up the reduction schedule,” starting from the expected January to October at the earliest.

Economists surveyed by Reuters predict that the Fed will announce a reduction in its asset purchase plan in August or September, and begin to cut its bond purchase plan for the first time early next year.