U-Turn in the Fed Minutes by Tim McLaughlin
In the FOMC Minutes released Tuesday, the Federal Reserve stated that it is holding off on increasing monetary accommodation unless the US economic expansion falters or prices rise at a rate slower than its 2 percent target.
A few members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below 2%.
In its initial plan, first announced in January, they pledged to hold interest rates near zero through late 2014 as the economy may fail to grow fast enough to continue bringing down the unemployment rate. Fed Chairman Ben S. Bernanke has defended the pledge as appropriate since the meeting, saying that despite some improvement in the economy it’s “far too early to declare victory.”
However, the minutes of the meeting show decreased urgency to add monetary stimulus. At their January meeting, a few members said that current economic conditions “could warrant the initiation of additional securities purchases before long.” In last month’s meeting, no sentiment was expressed for additional easing without deterioration in conditions.
From a market trading desk perspective, the comments were viewed as pretty hawkish. Treasuries immediately sold off (accounting for the majority of the price decline/rate increase this week) as the market clearly has pushed out and further discounted QE3. Of note is one member saying maintaining current level of policy much beyond this year “would likely be inappropriate,” thus the inference that some members of the committee and the market in general, now expect some percentage chance that tightening (i.e. – the increase in interest rates) would be needed “well before” the end of 2014 to keep inflation close to 2%.
Takeaway:
On the release, the Fixed Income markets went into an immediate tailspin, surmising that benchmark rates may not stay “historically” low until the end of 2014 as originally projected if the economy/employment continues their progressive improvement and/or if inflation does not stay in line with the levels that the Fed deems acceptable. Granted, rates have retraced back downward somewhat towards the tail end of the week, but the Fed minutes were the spark that set the increase of yields on the front end.
