US Federal Reserve Chair Jerome Powell
(US Federal Reserve Chair Jerome Powell)

World stocks rocked by US Federal Reserve plan

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Minutes from the U.S. Federal Reserve’s 27-28 July meeting released Wednesday (August 19) suggest tapering of monthly asset purchases “could be appropriate” before the end of the year as most participants said progress had been made toward the central bank’s inflation goal.

Meanwhile, “some” Federal Open Markets Committee (FOMC) members noted it would be better to wait until 2022 to start tapering bond purchases a.k.a. buying less and less debt (currently to the tune of $120 billion monthly) .

Those FOMC members believed that while employment has improved (job gains average 617,000 a month through July) and inflation remains high (well above the Fed’s 2% target), the labor market has not improved enough to begin the taper discussion and needs more help (therefore more bond purchases) to fully recover.

“Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes said. “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year,” the minutes added.

The consumer price index (CPI) grew by 5.4% in June compared to the year earlier, the largest such gain since August 2008.  Even the Core CPI- the Fed’s preferred measure of inflation that excludes food and energy because their prices are much more volatile-rose by 4.5%.

The unemployment rate stood at 5.4% in July, a vast improvement over conditions just a few months ago, but broader measures still show slack.

Fed ratesetters also reiterated that tapering would not necessarily mean an imminent rate increase.
Bond purchases and interest rates are two monetary policy tools.

But as Joseph Trevisani, a Senior Analyst FXStreet wrote “tapering the Fed’s bond program will not lead to rate hikes in the US. The taper is a rate hike. Once the Fed makes it plain that it is winding down the bond purchases that have kept US interest rates historically low, the credit market will do the rest.”

U.S. markets experienced a sell-off on Wednesday (August 18) as investors digested the Fed minutes. Asian stocks fell on Thursday (August 19) as investors digested the selloff on Wall Street and European markets sank this morning on Fed tapering concerns.

Fed’s 18 top officials, who include the six members of the Washington-based board of governors and the 12 heads of the regional Fed banks next meet September 21-22.