FOMC minutes ‘support’ September taper

TaperingMarkets were yesterday digesting minutes from the Federal Reserve's interest rate-setting committee as expectations about a reduction to quantitative easing continue.

Market participants hoped to get further clarity on the Fed’s tapering plans from the Federal Open Market Committee (FOMC) minutes.

The minutes do appear to support that the Fed will announce the beginning of tapering in its September meeting, says Peter O'Flanagan, senior foreign exchange sales trader at Clear Currency.

But he adds that “overall the signals were somewhat muddied”.

Tapering will depend on the pace of growth in the economy and the data supporting it.

O’Flanagan says September’s non-farm payrolls “will be huge, but the run of weekly jobless claims has been steadily declining so we do not expect any material shock to affect the taper”.

He also says there appears to be some split on taper timing within the FOMC, and that there may be some compromise on the size of the taper, meaning a possible reduction from $85 billion (€63 billion) in asset purchases per month to $75 billion. The markets had called for a reduction to $60 billion.

The dollar rallied and treasury yields widened, while US equity markets fell “as the supply of easy money looks to be set to slow in September”. 

Martin Arnold, senior analyst at ETF Securities, says it is likely cyclical assets will suffer declines if the Fed begins to withdraw stimulus because investors expect a reduction would adversely affect potential growth.

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