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– The minutes of the June FOMC meeting show significantly differing views on the path (in particular on the timing) towards tapering asset purchases. However, consensus was virtually unanimous on the need to keep purchases in place at their current pace at least for a while longer: differences in opinion concerned the date on which the tapering should start, and the termination of the programme. Participants agreed that the labour market scenario has improved, however “many” members felt further indications of an improvement in the outlook should be awaited before slowing purchases. “Others” also wish to await the expected acceleration in growth, as well as signals from the labour market, before adjusting purchases, and one member thinks inflation should also shift upwards before such action is taken. “Some” members think purchases should be slowed soon, in light of the cumulated improvement in the unemployment rate observed since September. The minutes confirm that a clear path for the programme still hasn’t been laid out, and that within this picture of varied opinions, the Chairman’s weight will probably prove decisive in building consensus.
– A key topic tackled at the June meeting was the communication of future changes to the purchase programme. Some think it is appropriate to prepare the market by signalling that macroeconomic conditions make a tapering likely in the short term, others believe it is best to keep communication on hold in order to have greater freedom of action; the possibility was also debated of introducing threshold levels for some macro variables, as has already been done for the interest rate guidance. Ultimately, the meeting opted for the strategy to keep clarity and transparency as high as possible, by communicating the prevailing opinion. The inclusion of indications in this sense in the statement was discussed, but the idea was rejected out of concerns that a few, synthetic sentences might result in mistaken interpretations by market participants. At the conclusion of the discussion, the decision was to delegate the Chairman to describe “a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee’s expectations”.
Bernanke is also called to clearly communicate the distinction between the purchase programme and forward guidance on rates, signalling that there will be “a considerable time” between the end of purchases and the time of the first fed funds rate hike.
– The minutes have not changed forecasts with regards to the purchase programme. The minutes reveal consensus for a reduction of purchases in the coming months, probably reinforced by data contained in the June Employment Report. However, the increase in the participation rate recorded in the past two months (one-tenth a month in May and June), and still weak growth on some dimensions (survey of enterprises and 2Q GDP) will induce the FOMC to wait at least until September before modifying the programme. We expect that at the September meeting, other two sets of monthly data (July and August), plus information on growth in 3Q, should give the FOMC the input it needs in terms of a consolidation of the labour market outlook and of an acceleration of the recovery. The reduction of asset purchases will in any case be gradual and implemented over many months.
– Next week, Bernanke will present the Monetary Policy Report to Congress (to the House on 17 July, and to the Senate on the 18th). The testimonies will provide a further opportunity to stress 1) even once the Fed starts reducing purchases, it will continue to add stimulus albeit at a slower pace; 2) the size and composition of the purchase programme will remain data-dependent; 3) a considerable period of time will pass between the end of purchases and the
first interest rate hike. Bernanke is likely to repeat that for the tapering to begin, the scenario will have to evolve in line with the FOMC’s expectations: economic data releases in the months ahead remain crucial in guiding monetary policy decisions.
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