Instant Analysis: October FOMC minutes
- October FOMC minutes were not dovish enough for markets.
- Solid jobs reports could trigger tapering announcement in January.
The minutes of the October FOMC meeting were not dovish enough for the markets to sustain their recent rally. Both stock and bonds sold off in the afternoon following the release of the minutes. The U.S. dollar rallied and gold fell as investors parsed the language of the minutes. The take-away is that the FOMC largely saw the economic drag from the October government shutdown as limited and temporary.
Though there was some concern about lingering effects on economic growth and confidence from repeated fiscal impasses, the Committee still sees the drag from fiscal policy, household deleveraging, global growth, and tight credit conditions diminishing next year.
The was no watering down of the FOMC’s threat to begin tapering monthly asset purchases over the next few meetings, if economic conditions continue to evolve as they expect. However, the ultimate timing remains data-dependent. On communications, the FOMC wants to emphasize the asset purchase program is data dependent and “…any reduction will depend on the cumulative progress in the labor market since the start of the program as well as the outlook for future gains…”
The Committee’s outlook for ongoing improvement in labor market conditions “…would warrant trimming the pace of purchases in coming months.” My view is that if the next two payroll reports come on the strong side, the FOMC could be ready to pull the trigger on tapering purchases at the January FOMC meeting.
Participants generally expressed reservations about introducing a mechanical rule for reducing monthly asset purchases based on indicators such as the unemployment rate or payroll employment, while some preferred announcing a total size of remaining purchases or a calendar-based step-down approach to tapering.
A number of participants believed that making roughly equal adjustments to purchases of Treasury securities and MBS would be appropriate and straightforward to communicate to the public. Some supported trimming the pace of Treasury purchases first, while one participant thought trimming MBS purchases first would reduce distortions in credit allocation.
There was no agreement on strengthening forward guidance for the federal funds target rate. A couple of participants favored reducing the unemployment rate threshold, but others noted that a change might raise concerns about the durability of the Committee’s commitment to the thresholds. Reducing the interest rate paid on excess reserves was also discussed as a way to reinforce the forward guidance on the Fed funds rate and keep short-term interest rates low.
Markets seem somewhat disappointed by the lack clarity from the FOMC on when a taper of asset purchases could occur as well as the absence of agreement on how to strengthen the forward guidance on the Fed funds target rate.