Fed minutes may reveal extent of initial taper talks

The Federal Reserve is set to reveal the extent of its initial discussions on reducing its $120bn asset purchase programme, as the US central bank prepares to slow the massive monetary support injected into the world’s largest economy during the pandemic. 

Minutes from last month’s Federal Open Market Committee meeting due at 2pm on Wednesday are expected to show that Fed policymakers began to consider when and how to start trimming the purchases of US Treasury bonds and mortgage-backed securities, which were paired with rock-bottom interest rates throughout the coronavirus crisis. 

Some Fed officials have been pushing for an earlier start to the “tapering” process, expecting a faster recovery of the labour market and a more concerning jump in inflation.

But other top US central bankers have urged caution in winding down the bond buying. They believe that inflation increases will be transitory, the economy is far from full employment and the pandemic is still a risk. As a result, markets could balk at an aggressive removal of monetary support. 

At the last FOMC meeting, the Fed kept its main interest rate on hold close to zero, but upgraded its economic outlook to show stronger growth this year than initially predicted.

Fed officials also forecast that they would be tightening policy with two interest rate increases in 2023, earlier than expected just three months ago. But Fed officials have cautioned that those predictions would be dependent on the flow of economic data, and policy guidance would only come through the FOMC’s statement.

Some investors interpreted the new interest rate projections as an indication that the Fed may prove more responsive to inflationary pressures than previously expected, prompting a sharp rally in US government bond prices, which has since sent yields on the benchmark 10-year note down to 1.3 per cent. That is the lowest level in four months. 

The ultra-long 30-year bond now trades at roughly 1.9 per cent, well off of its 2.3 per cent level seen at the start of June.

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