The Federal Reserve will do what it can to stave off a taper tantrum when it finally decides to scale back its bond purchases, minutes from Wednesday’s most recent central bank meeting.
After a two-day session on December 15-16, the policy-making Federal Open Market Committee voted to keep its benchmark anchored near zero for the short term.
However, the markets were focused on discussions of the Fed’s asset purchase program. The central bank buys at least $ 120 billion in Treasury and mortgage-backed securities every month, and pledged at the meeting to do so until it sees “substantial further progress” toward its inflation and employment targets.
Minutes noted unanimous approval of the program’s “results-oriented” approach, although members noted that this does not mean that purchases will be linked to specific numerical targets.
Officials agreed that markets would be amply notified before asset purchases were curtailed. The last time the Fed cut back on asset purchases, it triggered a “taper tantrum” in the marketplace that officials want to avoid this time around.
Several participants noted the importance of the committee clearly communicating its assessment of actual and expected progress towards its longer-term goals well in advance of the time when it would be judged to be substantial enough to warrant a change in justify the pace of purchase, “the minutes said. said.
Members further noted that once the threshold for ‘substantial further progress’ is reached, the tapering off of purchases would be “ gradual ” and along the lines of what the Fed did from 2013. During the previous reduction in purchases, the Fed has spent how much it was buying every month. It later allowed a limited amount to pay off the proceeds of the bonds it still held each month, while the remainder was reinvested.
There was some expectation that the commission would speed up the pace of purchase or extend the life of the bonds. The last step would be an attempt to stimulate the economy by lowering interest rates over the longer term.
While the markets monitored how much favor the committee members had in adjusting the duration of the purchases, the minutes noted that only “a few” officials said they were “open to” the idea of buying longer-dated bonds.
During the meeting, the members also adjusted their economic forecasts for the coming years. On balance, the committee became less pessimistic about economic growth than in September and lowered its projections for unemployment.
Officials noted that economic data around the time of the meeting was usually better than expected, but the accelerated spread of Covid-19 presented a challenge and growth generally remained significantly below pre-pandemic levels.
“They noted that the economic recovery so far has been stronger than expected – indicating greater momentum in economic activity than previously thought – but viewed the more recent indicators as a sign that the pace of the recovery had slowed,” said the notes. “As the pandemic worsened across the country, expansion was expected to slow even further in the coming months.”
There was virtually no change in the statement after the previous meeting, except for the language surrounding asset purchases.