FOMC tops this week’s headlines
This week’s headlines will be dominated by the reading of the July Federal Open Market Committee meeting minutes. The currency markets are showing signs of tightening ahead of the FOMC minutes, with the US dollar consolidating at 81.2830 against a basket of its major peers. The stock markets, on the other hand, continued their gradual descent as investors await the central bank’s next gesture. Wednesday’s FOMC minutes promise to shed onto the Federal Reserve’s willingness to taper asset purchases at its next meetings, scheduled to take place September 17-18.
Last month the Fed opted to hold its benchmark lending rate and asset purchase facility steady at 0.25 percent and $85 billion a month, respectively, citing the market was still in need of support. Over the past several weeks, however, regional Fed Bank presidents have signaled a change in course may soon be under way. The Wall Street consensus already believes this to be the case, with two-thirds of economists surveyed by Bloomberg expecting a $20 billion taper at the culmination of the next FOMC meetings.
Market participants looking to size the likelihood of a Fed taper should focus on whether the FOMC minutes reveal operational details about the Fed’s next course of action. They should look for concrete discussion about how much the Fed is looking to taper and in which assets (US Treasuries or mortgage-backed securities).The current pace of QE is $45 billion in US Treasures and $40 billion in MBSs. Market participants should also be weary of how the Fed is planning to signal subsequent tapering moves. This could mean strengthening forward guidance on interest rates, or several other factors for guiding the markets.
The meeting minutes are likely to sound more hawkish than the Fed intends, as this has been the trend for most of the year. While the meetings provide a platform to hawkish non-voters, they are likely to reveal a split between two groups: those who favour an imminent taper in light of the economy’s cumulative progress and those who prefer to stand pat for more momentum.
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