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From talking the talk to walking the walk: the Fed’s on tapering mode

Most participants to the FOMC July meeting noted that, provided that the economy were to evolve broadly as they anticipated, it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal.

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 because they saw the Committee's "substantial further progress" criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal. Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. 

The Minutes of the the FOMC Meeting held on July 27-28, 2021 revealed an emerging consensus among the FOMC participants about the potential for tapering off the US Federal Reserve's COVID crisis related assets purchase policy as early as this year. This change of tone among the Fed's policymakers has been motivated by the progress made toward the realisation of the guidance set in December 2020. More specifically, most participants have judged that the guidance toward an inflation moderately above 2 percent - consistent with the Fed's new Average Inflation Targeting framework - has already been achieved while the "substantial further progress" toward the maximum employment objective has not been achieved yet but that the economy was steadily moving in that direction, despite the threat posed by the Delta variant and its impact in delaying a full reopening of the US economy.

The released Minutes of the Federal Open Market Committee held on July 27-28, 2021 triggered a temporary equity market sell-off. This did not prevent the equity markets to move back into a risk-on mode and to regain some of their losses. The S&P and Nasdaq are still up by more than 15 percent on a year-to-date basis (cf. chart below). This contrasts with the broader Russell 2000 which is still about 10 percent off its peak, signalling the heavy bias exercised by a few outsized companies on the overall direction of the S&P 500. However, the most interesting reaction came from the bond markets. Indeed, following the releases of the Minutes, the yield curve exhibited diverging movements at different maturities with the yield on 2-years Treasuries increasing by 20 basis points over three days while the yield on the 10 years US treasuries remained barely unchanged.

The Tapering risk balance


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