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The key phrase in the minutes that seems to have shaken the market is ‘trimming the pace of purchases in coming months’. This raises the spectre of tapering, the thing the market seems to most fear, and that was enough to send the Dow down 0.55% to 15,879 late in the trading session.
It’s worth stressing, however, that the wording is paired with the caveat that data would need to follow in line with the Fed’s expectations for improvement in labour market conditions. In other words, they’ll taper in coming months if data continues to show recovery. This is not a whole lot of new information.
What is interesting is that certain members of the committee proposed winding down stimulus before improvements became apparent, perhaps based on whether they no longer felt stimulus was proving effective. It sounds like they were shouted down, but the minutes do not tell us how many people felt which way. The minutes do reveal that if they were going to head down this particular alley, they would need to communicate the criteria and that if they did taper in this way, they might well utilise some other method of loose monetary policy, saying ‘ it might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time.’
Another point to bear in mind is that the minutes give a snapshot of the past. What we read today, was what the FOMC thought last month; we have more information available to us now than the committee did back then, including today’s CPI report showing a decline in prices last month. As the minutes note, the Fed recognises ‘that inflation persistently below the Committee's 2% objective could pose risks to economic performance’.
At the risk of labouring the point, though, I consider the crucial part of the Fed’s message to be how the decision hinges on incoming information: ‘Many members stressed the data-dependent nature of the current asset purchase program.’ It’s all about the data. Ben Bernanke was still sticking to his guns in stressing this data-dependent aspect last night, saying that asset purchases could even be increased ‘for a time, if warranted.’