Federal Reserve officials at their July gathering made plans to pull back the pace of their monthly bond purchases likely before the end of the year, meeting minutes released Wednesday indicated.
However, the summary of the July 27-28 Federal Open Market Committee gathering indicated that the central bankers wanted to be clear that the reduction, or tapering, of assets was not a precursor to an imminent rate hike.
“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 stated, adding that the economy had reached its goal on inflation and was “close to being satisfied” with the progress of job growth.
The minutes noted that “some” members preferred to wait until early in 2022 to start tapering.
Addressing interest rate concerns, committee members also stressed the need to “reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate.”
Fed officials have said repeatedly that tapering will happen first, with interest rate hikes unlikely until the process has been completed and the Fed isn’t growing its balaance sheet anymore.
Markets briefly rebounded after the minutes’ release but then turned negative again, with the Dow Jones Industrial Average down more than 150 points.
The FOMC voted at the meeting to keep short-term interest rates anchored near zero while also expressing optimism about the pace of economic growth.
While the message about tapering had been telegraphed ahead, the Fed has a difficult communications job in making sure its strategy is clearly outlined. There are concerns in the market that the Fed might set its tapering pace on a strict course even if the economy sours.
The post-meeting statement painted a generally upbeat look on the economy, but the minutes noted some misgivings.
Officials judged that “uncertainty was quite high” about the outlook, with the Covid-19 delta variant posing one challenge and inflation another. Some members noted “upside risks to inflation,” in particular that conditions Fed officials have labeled as transitory might last longer than anticipated.
While the market is expecting tapering soon, it still doesn’t see interest rate hikes coming at least for another year or so. Futures contracts tied to the fed’s benchmark interest rate are pricing in about a 50% chance of a rate hike in November 2022 and a 69% chance of an increase the next month.
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The Federal Reserve on Wednesday released the minutes from its July 27-28 meeting.